Archive for the ‘Undue influence’ Category

Undue influence: presumption of undue influence where lender’s lawyer fails to properly advise borrower for whom it also acts

April 8, 2022


In Nature Resorts Ltd v First Citizens Bank Ltd ([2022] UKPC 10) Nature Resorts Ltd (‘NRL’) owned the Culloden Estate (‘the Estate’) in Tobago. It was accepted that Mr. Dankou was the sole shareholder and ‘controlling mind and will’ of NRL so that Mr Dankou and NRL could be treated as one and the same for the purposes of the case except where Mr. Dankou was clearly acting in a personal capacity ([2]).

Mr. Dankou’s intention was to develop the Estate as an eco-resort and he secured investment from ‘silent investors’. He was, however, unable to secure all the finance needed for the development.

Mr. Dankou agreed to sell 75% of his shares in NRL to Simon Paler and Christopher James. Messrs. Paler and James borrowed part of the purchase price from First Citizens Bank Ltd (‘the Bank’). The Bank insisted that NRL grant it a charge over the Estate as security for the loan. Part of the purchase price payable to Mr. Dankou was left outstanding and Messrs. Paler and James provided a promissory note in respect of this sum.

Mr. Wheeler was the lawyer who acted for all parties in relation to the above transactions.

Messrs. Paley and James did not make any loan repayments. The Bank decided to exercise its power of sale under the charge over the Estate.

NRL argued that the charge was voidable because of the undue influence exerted by Mr. Wheeler over Mr. Dankou / NRL. This argument failed both in the High Court and the Court of Appeal of Trinidad and Tobago. NRL appealed to the Privy Council. Lord Briggs and Lord Burrows gave a joint judgment with which the other members agreed (on the undue influence question).

What is undue influence?

The Privy Council accepted that the law of Trinidad and Tobago concerning undue influence was the same as the English law ([1]). Undue influence was explained in these terms:

‘undue influence is concerned with a situation where, by reason of the relationship between them, one party (B) has such influence over the other (A) that A does not exercise a free judgment, independent of B, in relation to the making of a transaction between A and B (or, in a three-party situation, between A and a third party, C)’ ([10]).

In Pesticcio v Huet ([2004] EWCA Civ 372) Mummery LJ explained:

‘Although undue influence is sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention is not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction is not satisfactorily explained by ordinary motives … A transaction may be set aside by the court, even though the actions and conduct of the person who benefits from it could not be criticised as wrongful. ([Pesticcio v Huet at [20]].

Presumed undue influence

The party seeking to rely on undue influence must prove their claim on the balance of probabilities. They can, however, try to raise a presumption of undue influence and the burden would then pass to the other party to show that the decision to enter into the transaction was the result of a free and informed decision. Mr. Dankou argued that there was a presumption of undue influence in the present case.

Following the decision in Royal Bank of Scotland plc v Etridge (No 2) ([2001] UKHL 44) the presumption of undue influence is said to arise where, ‘the nature and / or contents of the transaction must make one conclude, in the context of the relationship of influence, that, absent evidence to the contrary, undue influence has been exercised.’ ([12])

Mr. Dankou argued that the relationship between himself / NRL and Mr. Wheeler was one of influence and that Mr. Dankou / NRL did not benefit from the grant of the charge to the Bank so that the transaction was not readily explicable on ordinary motives.

The High Court decided that neither requirement of the presumption of undue influence was satisfied. The Privy Council preferred not to comment on the view that there was no relationship of trust and influence between Mr. Wheeler, on the one hand, and Mr. Dankou / NRL on the other. The Privy Council thought that this raised, ‘difficult questions as to the operation of the so-called irrebuttable legal presumption that the relationship is one of influence’ on which they were not addressed ([29]).

The Privy Council, nevertheless, agreed that there was no presumption of undue influence in this case. The transaction was readily explicable on ordinary motives; the commercial interests of Mr. Dankou / NRL were furthered. The High Court found that the sale of the shares enabled Mr Dankou to pay money to his silent investors and also enabled various debts of the company to be paid off. The Court of Appeal disagreed with this and thought that there was a presumption of undue influence.

The Privy Council sided with the High Court in this regard:

‘The deed of mortgage opened the money-box from which Mr Dankou received payment for his shares. Without it, the sale would have fallen through. Although the Court of Appeal was careful to say, at para 53, that it was NRL that derived no benefit from the mortgage, the Board considers it unrealistic to ignore the benefit to Mr Dankou when considering whether the mortgage was readily explicable. It was the benefit to Mr Dankou, as the sole shareholder in NRL at the time when the transaction was entered into, that rendered the transaction readily explicable. In the Board’s view the Court of Appeal was wrong to ignore this bigger picture and therefore wrong to take the view that the deed of mortgage was not readily explicable.’ ([28])

The presumption of undue influence where the same lawyer acts for borrower and lender

As we have seen, the Court of Appeal thought that a presumption of undue influence was raised in this case. The Privy Council disagreed and expressed concerns about the implications of the Court of Appeal’s reasoning. It was worried that it would mean that parties would be able to raise a presumption of undue influence, arising out of the advice of their lawyers, whenever a transaction worked out badly. If the same lawyer advised both sides then any party for whom the transaction worked out badly might be offered an unjustified escape route on the basis that the lawyer was the agent of the other party (so that any undue influence of the lawyer could be attributed to the client):

‘[26] The Board has concerns that the reasoning of the Court of Appeal may lead to the view that, in many situations where a solicitor (or attorney) is providing professional advice to a client, and the client then enters into a disadvantageous commercial transaction with a third party, the client would be able to invoke the law on undue influence (including the law of agency) to set aside the transaction. There are many instances where, for example, the solicitor is acting for both a purchaser of land and a lender of the money for the purchase where that relationship should not operate to give rise to a presumption of undue influence for either client to be used against the other. This is so where the solicitor does not obtain any personal benefit (beyond his normal fees) from the transaction.

[27] In the Board’s view, where the other party to the transaction is not the solicitor obtaining some benefit from the client but is rather a third party, an ordinary commercial transaction such as a mortgage, entered into by a person engaged in business, should rarely be regarded as one that is not readily explicable on ordinary motives, merely because it is, or turns out to be, disadvantageous. It is readily explicable that the client will enter into such a transaction without being under the undue influence of the solicitor.’

If there was a presumption of undue influence, was it rebutted?

The Court of Appeal decided that there was a presumption of undue influence but that this presumption was rebutted. The Privy Council decided that the Court of Appeal was justified in deciding that, even if a presumption arose, it was rebutted.

Rebutting the presumption requires the other party to show that the transaction was the result of a free and informed decision. The Privy Council commented:

‘Although neither necessary nor conclusive, the main method of rebuttal is to show that A obtained the fully informed and competent independent advice of a qualified person, most obviously a lawyer.’ ([13])

The Court of Appeal thought that the presumption of undue influence was rebutted; it was satisfied that Mr. Dankou understood what he was doing and the associated risks. The Privy Council agreed: ‘advice from a lawyer is not the only way in which it can be established that free and independent judgment was being exercised.’ ([23]).

The corporate veil

Clearly, the Privy Council’s analysis relies on treating Mr. Dankou and NRL as being one person. The commercial interests of Mr Dankou are treated as being those of the company; Mr. Dankou’s independent judgment is that of the company.

Michael Lower


Family home in joint names and wife’s failure to transfer her interest to her husband in accordance with a consent order

November 4, 2017

In Chu Tsan Leung v Leung Mee Ling Amy ([2017] HKEC 2347) H and W were married. Title to the family home was in joint names. W left the family and in the subsequent matrimonial proceedings agreed to transfer her entire interest in the property to H. This agreement was incorporated in a consent order. W did not execute a deed to give effect to the order.

W was subsequently declared bankrupt. The Trustee in Bankruptcy claimed that W’s interest in the property remained an asset of hers. H sought a declaration that W did not have any beneficial interest in the property.

The Trustees in Bankruptcy argued that the consent order was procured through the exercise of undue influence by H and his solicitors. They argued that there was a presumption of undue influence on the facts of the case. This failed.

The evidence pointed away from the idea that the wife reposed trust and confidence in her husband at the time of signing the consent order. Nor was there anything unconscionable or manifestly disadvantageous to W when the context was properly considered: H, a construction worker, had been left to take care of two young children on his own.

It did not help W’s case for her to argue that she did not have full knowledge and understanding of the documents that she had signed. A person who signs a legal document he or she is bound by the act of signature (Bank of China (Hong Kong) Ltd v Fung Chin Kan and Ming Shiu Chung v Ming Shiu Sum).

H became the sole beneficial owner of the property from the moment of the decree absolute.

H argued, in the alternative, that he had always been the sole beneficial owner of the property since he alone had provided all of the purchase money and mortgage payments. This claim failed. Since title was in joint names, it was for H to show that she had no equitable interest. H was unable to do so.

Michael Lower



Elderly father’s gifts to his children set aside on the grounds of undue influence

January 25, 2017

In Chan Yuk Pui v Chan Yui Chi ([2016] HKEC 1891) the plaintiff (‘P’) was an elderly man who owned four properties as joint tenant with one of his sons. The complaints of the defendants  (P’s other children) led him to sever the joint tenancies. They promised him that they would look after him and that he would live with them until his death (‘the promise’).

Relying on the promise, P executed deeds of gift of his half share in each of the properties so that they were divided among the defendants. Having an assurance that he would be looked after in his old age was P’s dominant concern. When the defendants failed to live up to the promise that they had made, P sought to have the deeds of gift set aside on the grounds that they had been procured by undue influence.

P did not allege that he had been misled or coerced or that he had failed to understand the nature of the deeds of gift. Au Yeung J pointed out (at [4]) that he could still show actual undue influence where:

(a) the defendants had failed to point out to P that the transaction was not to his advantage and to ensure that he took proper independent advice; and

(b) there was unconscionability.

Unconscionability is a serious allegation and is not to be found lightly ([5]).

There were express findings that P did not repose trust and confidence in the defendants and that he understood what he had signed.

The transaction was obviously disadvantageous to P since he lost all of his sources of income as a result and had only his savings to rely on. The defendants had not pointed this out to P. Although P had legal advice this was not independent; the lawyer who gave the advice did not consider the implications of the transaction from P’s perspective but saw P and the defendants as being a single client with identical interests ([115]).

The defendants had behaved unconscionably. They had acted in concert to get P to transfer his interest in the properties to them. In doing so, they preferred their own interests over those of P and had disregarded the adverse consequences that the gift would have for them.([104]).

‘[I]t was clear that the Defendants were the dominant party, had the capacity to influence the plaintiff and did exert that influence. That exercise was undue as they preferred their own interests over that of the Plaintiff … The Defendants did not allow the Plaintiff to exercise free and informal judgment … The Plaintiff’s mind was a mere channel through which the will of the Defendants operated.’ ([138])

Michael Lower


Undue influence: what is the next stage once the presumption of undue influence has arisen?

April 7, 2014

In Hammond v Osborn ( [2002] EWCA Civ 885) O took care of P (an elderly neighbour) out of kindness and compassion. He gave her GBP300,000 (the value of his investments). Part of the money was used to buy a house. Title was in F’s name (O’s son) but he held it on trust for her. The result was that P lost over 90% of his assets and became prospectively liable for a large tax bill which he would not have been able to meet out of his remaining assets. O did not explain this to P, she merely asked him whether he was sure he wanted to make the gift. P later died intestate. The gift to O was challenged by H, the administratrix of P’s estate.

The relationship and the transaction were such as to give rise to the presumption of undue influence. The question was whether the presumption could be rebutted by showing that the transaction was the result of  the exercise of independent exercise of P’s free will. Had the gift been made only after full, free and informed thought about it? ([25]).

P had not received advice as to the nature and effect of the transaction from an independent, qualified person. In fact, he had not received any advice at all, even from O.

‘Even if it is correct to say that Mrs Osborn’s conduct was unimpeachable and that there was nothing sinister in it, that would be no answer to an application of the presumption …  the court does not interfere on the ground that any wrongful act has in fact been committed by the donee but on the ground of public policy, which requires it to be affirmatively established that the donor’s trust and confidence in the donee has not been betrayed or abused.’  (per Sir Martin Nourse at  32).

Ward LJ emphasised that in cases of presumed undue influence, the courts interefere on the grounds of public policy and not because there is any finding that there has been actual undue influence. The next stage of the inquiry, once the presumption has arisen, is to consider whether  the party to whom the burden has shifted can show that the transaction was the result of full, free and informed thought. This will usually be done by showing that the necessary independent advice was given. Here there was a total absence of independent advice ([50]).

A survey of the circumstances in which the decison was made and of its consequences for P did nothing to rebut the presumption of undue influence. The presumption had not been rebutted and the gift was set aside.

Michael Lower

Presumption of undue influence requires disadvantage

March 17, 2014

In National Westminster Bank plc v Morgan ([1985] AC 686, HL) a husband and wife signed a charge over their jointly-owned property in favour of the bank. This was a condition attached to a bridging loan made by the bank. Without the loan, another lender would have enforced a possession order in respect of the property. The wife was hesitant about signing the charge but realised that otherwise she would lose her home. The manager of the local branch had brought the charge to her home and explained it to her. When, later, the couple were unable to repay the bridging loan, the bank sought an order for possession. The wife’s defence was that she had signed as a result of the bank’s undue influence.

Lord Scarman held that there was no undue influence. First, the relationship was simply that of banker and customer and there was no relationship of trust and confidence. Second, there is no presumption of undue influence unless there is something disadvantageous about the transaction (at 704). There was nothing disadvantageous to the wife about this transaction.

This ‘was an ordinary banking transaction whereby Mrs. Morgan sought to save her home’ (at 709).

Michael Lower

Undue influence: CIBC Mortgages v Pitt

March 12, 2014

In CIBC Mortgages plc v Pitt ([1994] 1 A.C. 200, HL) a husband and wife granted CIBC a charge over the matrimonial home which was in joint names. The loan application (in joint names) stated that the money was to be used to buy a holiday home but it was in fact used to allow the husband to buy shares. The husband procured his wife’s agreement to the loan and charge as a result of actual undue influence. The wife had never read the documents. The Stock Market crashed and the husband was unable to meet the repayments. The lender sought an order for possession. The wife relied on a defence of undue influence. She failed, despite the actual undue influence, since there was nothing to put the bank on notice of it.

Lord Browne-Wilkinson gave the only full judgment and he held that manifest disadvantage was not necessary in cases of actual undue influence. He also held that there is nothing to put the bank on notice as to the possibility of undue influence when the loan is to the husband and wife jointly.

Manifest disadvantage

This is not an essential element of undue influence (and need not be shown in cases of actual undue influence) (208 – 9).


The husband was not the bank’s agent, nor did it have notice of the undue influence.

‘If third parties were to be fixed with constructive notice of undue influence in relation to every transaction between husband and wife, such transactions would become almost impossible. On every purchase of a home in the joint names, the building society or bank financing the purchase would have to insist on meeting the wife separately from her husband, advise her as to the nature of the transaction and recommend her to take legal advice separate from that of her husband. If that were not done, the financial institution would have to run the risk of a subsequent attempt by the wife to avoid her liabilities under the mortgage on the grounds of undue influence or misrepresentation. To establish the law in that sense would not benefit the average married couple and would discourage financial institutions from making the advance.

What distinguishes the case of the joint advance from the surety case is that, in the latter, there is not only the possibility of undue influence having been exercised but also the increased risk of it having in fact been exercised because, at least on its face, the guarantee by a wife of her husband’s debts is not for her financial benefit. It is the combination of these two factors that puts the creditor on inquiry.’ (at 211).

Michael Lower

Undue influence: Lord Nicholls’ judgment in Etridge

February 17, 2014

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

Undue influence: not enough to urge surety to take legal advice

October 8, 2013

In Credit Lyonnais Bank Nederland NV v Burch ([1997] CLC 95) Miss B was a junior employee of Mr P’s business. He wanted to extend the limit of the business’ overdraft facility and persuaded Miss B to sign an unlimited guarantee of the business’ liability. Although the bank’s solicitor urged her to take independent legal advice she did not and no effort was made to ensure that she did. It was found as a fact that the relationship between Mr P and Miss B was one of trust and confidence (they were employer – employee on friendly terms, there was no suggestion of a sexual relationship).

The bank attempted to enforce its security but was met with a successful undue influence defence. The bank knew that the transaction was to Miss B’s disadvantage (so much so that the inference that the relationship of trust and confidence was easy to draw). It knew that she was a fairly junior employee. It was on notice (see Millett LJ at pp. 104 – 105).

Simply suggesting to Miss B that she take independent legal advice, far from being sufficient to protect its security, emphasised the fact that it knew that such advice was necessary in the circumstances.

On the relevance of the suggestion that she should take independent legal advice (and the fact that she did not do so), Nourse LJ commented:

‘[I]t was not enough for Miss Burch to be advised to take independent legal advice. It was at the least necessary that she should receive such advice.’ (at p. 101).

Advising Miss B as to the financial background to the transaction was vital:

‘She could not assess the significance [of being informed that her liability under the charge was to be unlimited in time and amount] without being told of the extent of API’s current borrowings and the current limit.’ (Nourse LJ at p. 101).

Millett LJ also expressed the view that if a bank knew that no competent solicitor could advise his client to enter into a given transaction then the fact that some advice was given will not be enough to protect the bank against an undue influence defence:

‘I do not, therefore, accept that a bank, in circumstances where it ought to appreciate the possibility that undue influence has been exercised, can escape the consequences by putting forward an unnecessarily, onerous form of guarantee and relying on the failure of the guarantor’s solicitor to advise her of the possibility of offering a guarantee on less onerous terms and more appropriate to the situation.’ (Millett LJ at p. 106)

Michael Lower

Undue influence: meaning and policy: Allcard v Skinner

October 3, 2013

In Allcard v Skinner (1887)) 36 Ch.D. 145, CA (Eng)) A’s spiritual advisor introduced her to S (the superior of a religious community). Several years later, she became a member of the community. This entailed a vow of poverty. She could give her wealth away to anyone she chose. In fact, she gave it (cash and shares) to the community. The rules to be observed by the members of the community forbade them from seeking outside advice. There was no suggestion that any pressure was placed upon her to make the gift (beyond that which resulted from her own enthusiasm for the principles and work of the community). Nor had there been any improper misappropriation of the funds; they were used for the charitable work of the community. The Court of Appeal held that in principle the gift could be set aside on the grounds of undue influence. By a majority, it held that her right to recover her assets had been lost as a result of her delay in asking for the return of the money after she had left the community.

On the meaning of undue influence, Lindley LJ said that it arises in cases ‘in which there has been some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating, and generally, though not always, some personal advantage obtained by a donee placed in some close and confidential relation to the donor.’ (at 181).

There was no evidence of that here.

Then there is another class of cases:

‘in which the position of the donor to the donee has been such that it has been the duty of the donee to advise the donor, or even to manage his property for him. In such cases the Court throws upon the donee the burden of proving that he has not abused his position, and of proving that the gift made to him has not been brought about by any undue influence on his part. In this class of cases it has been considered necessary to shew that the donor had independent advice, and was removed from the influence of the donee when the gift to him was made.’  (at 181)

This case belonged to this second group. The rules of the community actively prevented S from seeking the advice which is necessary in such cases to rebut the presumption of undue influence.

Equity’s intervention in cases of undue influence is based on the policy that ‘it is right and expedient to save them from being victimised by other people’. (at 182)

The Courts of Equity ‘have not shrunk from setting aside gifts made to persons in a position to exercise undue influence over the donors, although there has been no proof of the actual exercise of such influence; and the Courts have done this on the avowed ground of the necessity of going this length in order to protect persons from the exercise of such influence under circumstances which render proof of it impossible. The Courts have required proof of its non-exercise, and, failing that proof, have set aside gifts otherwise unimpeachable.’ (at 183)

It seems that in the second class of case more is needed than just the relationship of trust and confidence. It seems that the transaction itself must be such as to call for an explanation:

‘Where a gift is made to a person standing in a confidential relation to the donor, the Court will not set aside the gift if of a small amount simply on the ground that the donor had no independent advice. In such a case, some proof of the exercise of the influence of the donee must be given. The mere existence of such influence is not enough in such a case; see the observations of Lord Justice Turner in Rhodes v. Bate. But 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.’ (at 185).

Michael Lower

Barclays Bank plc v O’Brien: the risk of failing to take steps to ensure informed consent

October 1, 2013

In Barclays Bank plc v O’Brien ([1994] 1 AC 180, HL) a married couple granted the bank a second charge over the family home as security for the overdraft facility of a company in which the husband had an interest. The wife signed the document without reading it; she did so because of her husband’s misrepresentation to the effect that the liability to the bank was limited to GBP60,000 and that the exposure under the arrangement would only last for three weeks. In fact, it was an unlimited guarantee. The bank took no steps to have the documents explained to the wife nor did it suggest that the wife should take independent legal advice.

When the company failed to meet its obligations, the bank sought an order for possession of the home. W sought to set the charge aside on the grounds that it was the result of H’s misrepresentation and undue influence.

Only the misrepresentation defence was relied upon in the House of Lords. Nevertheless, Lord Wilberforce (giving the only full judgment) spoke about undue influence and considered the steps that a lender must take to protect itself from a claim that its agreement with a surety might be set aside in the event that it is entered into as a result of misrepresentation or undue influence.

Lord Wilberforce prefaced his analysis with a reminder that there are policy considerations to be borne in mind in shaping the law. The law needs to strike a balance between the need to protect wives from an abuse of the trust and confidence that they place in their husbands, on the one hand, and the need to avoid the creation of a draconian regime that would render family homes unacceptable as security for loans (at p. 188).

Lord Wilberforce considered the proposition that wives enjoy some special equity and are the object of special tenderness on the part of equity. He accepted that there was a greater risk of undue influence ‘than in the ordinary run of cases where no sexual or emotional ties affect the free exercise of the individual’s will’ (at p. 191). At the same time, with an eye no doubt to the future rational and orderly development of the law, he rejected the broad proposition that wives should be accorded special rights in relation to surety transactions. He rejected then the idea of ‘a special equity applicable only to such persons engaged in such transactions.’ (at p. 195).

The judgment seeks to create a legal environment that properly balances the interests of wives and lenders (described below). It is not only applicable to wives. Towards the end of the judgment, Lord Wilberforce emphasises that the same principles apply ‘to all other cases where there is an emotional relationship between cohabitees.’ (at p. 198). Thus, the principles and procedures set out in the judgment are to be followed ‘if, but only if, the creditor is aware that the surety is cohabiting with the principal debtor’. (at p. 198). Marriage is only one instance of a broader category.

The core of the judgment is its consideration of the circumstances in which lenders will take subject to the prior rights of the person whose consent was procured by undue influence or misrepresentation.

In a case like this, it may sometimes be possible for W to argue that H was the bank’s agent. This would provide a basis upon which H’s undue influence or misrepresentation could be attributed to the bank. An agency analysis of this situation, however, would usually be highly artificial (at p. 194).

Rather, the doctrine of notice provides the key: did the lender have actual or constructive notice of the misrepresentation or undue influence (at pp. 194 – 5)? The question is whether the lender is aware of facts or circumstances that put him on enquiry as to the possibility that the surety might have a right to rescind on the grounds of undue influence or misrepresentation. If the lender is put on enquiry and does not take reasonable steps to satisfy himself that W’s agreement to stand surety has been properly obtained then it will have constructive notice of W’s rights (at p. 196).

When is a lender on enquiry (so that it needs to take further steps)?

‘[A] creditor is put on enquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not 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.’ (at p. 196).

When the lender is on enquiry it must ‘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.’ (at p. 196).

The steps that a lender is expected to take are set out in this passage:

‘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.’ (at . 196)

In exceptional circumstances, where the lender knows of circumstances that make the exercise of undue influence probable rather than merely possible, the lender will need to ensure that the wife is separately advised (at p. 197).

This procedure seeks a fair balance between the wife and the lender, even though it does not guarantee that the wife fully understands the transaction (at p. 197).

As the bank had not taken steps to ensure that Mrs O’Brien had been properly informed of the nature of the transaction, it was fixed with constructive notice of Mr O’Brien’s misrepresentation.

Michael Lower