Undue Influence in Mortgages - Literature review Example

Undue Influence in Mortgages Undue influence is an equitable doctrine, which applies not only to instances involving the breach of trust and confidence, but also to afford protection to the susceptible against abuse. In Barclay’s Bank v O’Brien1, the Court of Appeal had invoked the law relating to misrepresentation and undue influence. The Court had developed a new principle of informed consent in transactions. According to this doctrine, the creditor has the knowledge that the debtor can influence a surety in his favour. In other words, such influence will only be available in a close relationship between the debtor and the surety, and this fact should be known to the creditor. Mrs. O’Brien pleaded that her husband had misrepresented the facts to her. The Court ruled that had the husband been the agent of the Bank, he would have been duty bound to explain to her about the legal charge, but that this was not the essence of the case. The Court viewed the matter before it in the light of equity, which provides special protection for a married woman who had acted as a surety for her husband’s debts. If the creditor knew about the relationship between the surety and the borrower then it could not enforce the obligation of surety. The Court also pointed out that the creditor had failed to take measures that would ensure that the surety had given informed consent to the transaction. The bank officials did not follow the guidelines set out in the covering letter and failed to furnish her with any information regarding the documents or the overdraft facility to be availed by her husband. The document had contained a clause that had recommended the obtention of independent legal opinion, regarding the documents, before signing it. She failed to follow that recommendation and signed on the document. She did not read the contents of the document prior to signing it. In its ruling the Court held that the plaintiff Bank did not utilize Mr. O’Brien as its agent. There was no apparent undue influence and even if such undue influence had occurred, the Bank had no knowledge about it. As such there was no possibility for the Bank to know the circumstances under which Mrs. O’Brien had been persuaded to sign the documents2. The House of Lords dealt with the case along the lines of undue influence in some specific relationships. As had been established in the case of National Westminster Bank plc v Morgan3, the husband and wife relationship does not fall under the category 2A of undue influence. Instances, where the wife establishes that she had vested her trust and confidence in her husband, are referred to as category 2B of undue influence. In Aboody4 the Court set out the requirement of apparent disadvantage to the surety under actual and presumed undue influence circumstances. However, the in CICB Mortgages v Pitt the House of Lords had opined that apparent disadvantage is applicable only to cases of presumed undue influence5. In Royal Bank of Scotland v. Etridge (No. 2)6 a wife joined her husband in taking out a mortgage on their marital home, so as to finance the husband’s business. The Barclays Bank v O'Brien decision has given great prominence to the advice given by an independent solicitor to the surety. Consequently, every lending bank has made it mandatory to ensure that the wives are informed in unequivocal terms to seek clarification and advice from an independent solicitor, regarding the documentation that they are to sign as surety7. Subsequent to the decision in Etridge, the direction of the bank to the solicitor to provide the wife with legal advice regarding the documents being executed by her as surety is adequate to safeguard the bank. Such protection is accorded to the bank, irrespective of whether such advice was insufficient or not even provided to the wife. The responsibility for providing such advice has been shifted on to the solicitor. This indicates a trend in the courts to discourage wives from avoiding charges over matrimonial homes8. In First National Bank plc v Achampong & others the mortgagee had failed to provide the wife with adequate information about the transaction. The wife represented to the Court of Appeal accordingly. The Court of Appeal held that the property was to be sold and the amount that constituted the husband’s share was to be appropriated. The wife’s share was to be left untouched9. In Charter v Mortgage Agency Service a mother transferred her property into a joint property with her son as the joint owner, in order to mortgage it to the Mortgage Agency Service, so as to obtain finance for the son’s business. Her plea of undue influence by her son was set aside, because she was unable to prove either undue influence or misrepresentation10. However, in the Etridge case, the House of Lords deemed it sufficient if the bank warned the wife in writing, that she had to perforce obtain legal advice from a solicitor of her choice and thereupon obtain a written confirmation from that solicitor that the wife had been imparted with such legal advice. This seemingly inconsequential provision has served to render the security provided by the wife, in respect of the matrimonial home, reliable, trustworthy and free of future litigation. Whatever, risk could arise from the furnishing of such surety has been made over to the solicitor who offers legal advice to the wife. As such the solicitor would have to recompense the wife, if he provides inadequate or negligent advice to the wife. Any transaction that is patently detrimental to one of the parties helps the complainant to establish a claim against its perpetrator in a case of presumed undue influence and it also assists in establishing that the third party had constructive notice of the wrongdoing. As such it can be concluded that subsequent to the O’Brien case the courts attempt to protect the interests of the vulnerable party in mortgages. The principle of informed consent emerged from the ruling in this case. The subsequent cases established that a solicitor’s advice should be obtained. Due to this requirement, the vulnerable party obtains adequate knowledge regarding the mortgage transaction. Furthermore, the solicitor has been made liable for negligence or for providing incomplete information in respect of the transaction. Subsequent to the decision in the O’Brien case, the question arose as to the extent of the effort to be expended by banks in order to ensure that independent advice had been obtained, so as to absolve them of all responsibility. The answer to this query was provided by decisions in cases after O’Brien. Initially, the cases ensuing O’Brien served to support that decision; however, the latter case law has depicted a trend that supports the lender to a greater extent11. In TSB v. Camfield two businessmen took an overdraft from the bank by mortgaging their respective houses12. The bank insisted upon their wives being provided independent legal advice. The solicitors did not comply with this, with the result that the wife was convinced by her husband that her liability was only for half the amount. The court refused to fix liability only for half the amount and annulled the transaction in its totality13. There are several reasons for the court to adopt such a course of action. First, there is a distinct absence of half measures in contract law, unlike the situation obtaining in tort law. The concept of contributory negligence is conspicuous by its absence in contract law. Consequently, a party is either wholly liable or is not at all liable. Secondly, in the O’Brien case, in the event of her being liable for a portion of the debt, she would have been compelled to sell the house, and to a certain extent the court’s decision had aimed at preventing such an undesirable outcome14. The decision in some cases has made it very clear that banks need to take only reasonable steps to guarantee that advice has been obtained independently. In the case of Banco Exterior Internacional v. Mann, the court opined that a bank was justified in assuming that the solicitor had provided the wife with appropriate counsel15. Similarly, in Midland Bank Plc v. Serter and Another16, a wife had signed a charge brought to her by her husband, subsequent to being advised by a solicitor. The court held that it was not the bank’s responsibility to instruct solicitors as to the manner in which they should provide legal advice to a wife17. In Royal Bank of Scotland v. Etridge there were claims by wives who had acted as sureties for the mortgage availed by their husbands18. On default of the loan availed by the husbands, the creditor proceeded against the property mortgaged to it. The wives pleaded that the guarantee given by them was to be revoked, because they had given their guarantee consequent to the undue influence brought to bear upon them by their husbands. They also alleged that the banks had constructive notice of these facts. In the O’Brien case the court had refused to accept the contention that such surety was to be given a special status or that the husband was to be considered to have acted as an agent for the lending institution. The court opined that in order for a lending institution to be bound as a third party due to the undue influence exercised by another, it was imperative for the lending institution to possess either constructive or real notice regarding the misconduct of the debtor. In general, there would be an absence of actual notice. However, there would be constructive notice if an enquiry had been conducted against the lending institution regarding the fact that prima facie, there was no financial advantage to the surety due to that particular transaction and that the principal debtor had either misrepresented the facts or had exercised undue influence19. In O’Brien, Lord Browne - Wilkinson opined that case law should ensure that the matrimonial home was not rendered unacceptable as security. This was due to the fact that small businessmen were the mainstay of the economy of the UK and that their principal source of reserve funds was the matrimonial home. Despite the fact that the wife had been advised by the solicitor, regarding her financial liability in standing as a surety, the influence of her husband will in general compel her to give her guarantee to the loan availed by him. The objective of a bank is to safeguard its funds in financial transactions. Moreover, a bank cannot be expected to verify, whether a solicitor had imparted legal advice to the wife in the prescribed manner. In addition, the receipt of a letter from the solicitor, stating that they had advised the wife, in the manner prescribed by law, is sufficient to absolve the bank from liability. On occasion, the same solicitor advises the husband and the wife, in such instances it is a distinct possibility that the solicitor would make his advice to the wife, congeal to the interests of the husband. Moreover, the bank and the borrowing couple may have the same solicitor, in such instances; the solicitor’s advice to the wife will always have the interests of the bank uppermost in his mind. In the Etridge case their Lordships had issued a number of guidelines to the banks, such as requiring them to ensure that proper legal advice had been given to the wife by communicating directly with her. Nevertheless, the banks were unconcerned about whether the solicitor had advised the wife in the prescribed manner. The aforementioned case law depicts this situation. Therefore, it can be concluded that the banks are chiefly interested in protecting their interests. In addition, it can be concluded that the solicitors work for the best interests of the bank and not the vulnerable party. Bibliography 1. Bainham, Andrew. The International Survey of Family Law. Martinus Nijhoff Publishers. 1997. P. 152. ISBN: 9041103740. 2. Banco Exterior Internacional v. Mann. (1995). 1 FLR 602. 3. Bank of Credit and Commerce International v Aboody (1990) 1 QB 923, CA. 4. Barclay’s Bank v O’Brien (1993) QB 109. 5. Charter v Mortgage Agency Service [2003] EWCA Civ 490. 6. CICB Mortgages v Pitt (1994) 1 AC 200, HL. 7. Feminist Legal Studies. Springer Netherlands. Vol. 7, No. 2. May 1999. ISSN: 1572- 8455. 8. First National Bank plc v Achampong (2003) EWCA Civ 487. 9. Giliker, Paula. Barclays Bank v. O’Brien Revisited: What a Difference Five Years Can Make. The Modern Law Review. Vol, 62. No. 4. July 1999. P.609. 10. Hudson, Alastair. Equity & Trusts. Cavendish Publishing. 2003. P. 659. ISBN: 1843145170. 11. Midland Bank Plc v. Serter and Another. (1995). 1 FLR 1034. 12. National Westminster Bank plc v Morgan (1985) AC 686, HL. 13. Royal Bank of Scotland v Etridge (No. 2) (2001) UKHL44. 14. Storey, Tony & Lidbury Allen. Criminal Law. Willan Publishing. 2004. P. 160. ISBN: 1843920557. 15. TSB v. Camfield. (1995). 1 WLR 430. Read More