Doctrinal Differences Relating to Vulnerable Surety Case Law - Coursework Example

Doctrinal Differences Relating to Vulnerable Surety Case Law al Affiliation) Barclays Bank v Obrien (1993) 4 All ER417 The judge held that the charge was not enforceable since the bank was under constructive novice and should have been aware of the undue influence the husband yielded on the wife, Therefore, the security for the surety(matrimonial home) was obtained under misrepresentation and undue influence and the transaction was not to the advantage of the wife. The House set a low threshold which had to meet before a bank was put on inquiry.1 The judge ,Lord Browne-Wilkinson asserted that ,a creditor is only put on inquiry when a wife offers to stand surety for the debts of her husband through the combination of two factors :- a. The transaction did not appear on face value to be of advantage to the wife2 and b. There was a substantial risk involved in transactions of that kind and by obtaining the wife to act as surety, her husband had committed an equitable wrong which entitled the wife to set aside the transaction.3 The husband’s unconscionable conduct was deemed to be a kind of legal wrong that if the doctrine of notice was applied properly, there would be no need to create a special equity in cases of that kind. 4According to the ordinary principles of equity, the wife’s right to set aside a transaction of that kind against third parties(Barclays Bank) would be enforceable if the husband was pursuing the role of a third party’s agent or the third party had established either constructive or actual novice of the facts that led to the establishment of her equity.5 He added that even though there were cases where in the absence of artificiality, it could be held that the husband was acting as an agent of the creditor(Barclays Bank) in the procuring his wife to stand as surety. The problem in this kind of cases lies in identifying the circumstances under which the creditor is taken to have been informed of the wife’s equity in order to set aside the transaction. The doctrine of notices important in determining equity. Since there were two innocent parties, enjoying their respective rights, the earlier right will be used against the latter right since the latter right acknowledges the actual notice or would have been discovered(constructive notice)6 if the proper steps had been followed. Therefore, unless the circumstances, the creditor is fixed with constructive notice of any wrongful doing by the husband. The bank was deemed to have failed to take notice of the husband’s impropriety through either misrepresentation or undue influence that established the wife’s right to set aside the transaction.7 The bank’s oversight had led it to fail to advise the wife to seek financial advice from an independent source since the husband had misrepresented the charge’s effect as being for a temporary period when in fact it was unlimited. This meant that the charge was unenforceable.8 Royal Bank of Scotland v Etridge (2001) 4 All ER 499 The case involves a transaction that occurred where a wife charged her interest in their family home in favor of the Royal Bank of Scotland as security for the debts of her husband. The wife (Mrs.Etridge) insisted that she signed the charge following undue influence from her husband.9 The bank was seeking to enforce the charge signed by the wife and was claiming an order for the purpose of claiming possession of the matrimonial home. The wife responded that the bank had been aware of the fact that she procured the charged only as a result of being under the influence of her husband.10 The judge held that whether a charge is brought due to a husband exercising undue influence11 was a matter in which the burden of proof lay with the claimant. If there is proof that the wife placed confidence in her husband in relation to the management of her financial affairs together with the surety12 in question is normally sufficient. In this case the court found the wife to have rebuttable evidence to support her claim that she was under undue influence.13 The distinction between undue influence and presumed undue influence14 was confusing. He further asserted that evidential presumption had to be distinguished clearly from the irrebuttable presumption that arises from special relationships 15where one party has influence over the other. The relationship between spouses was deemed to not have met the criteria to be classified as a ‘special relationship’. This was because in most cases, wives have good reasons to place financial benefits on their husbands.16 The judge contradicted with earlier case law from Barclays Bank v Obrien (1993) by stating that the phrase manifest disadvantage had clearly been interpreted in a narrow way regarding wives guaranteeing payment for their husband’s business debts.17 He stated that even though the transaction might not be advantageous to the wife by previous interpretation, the wife is bound to gain from securing her husband’s debts as this would secure the family’s income in some way. 18Undue influence had promoted impropriety among spouses as in its previous form, it applied to a variety of terms to mean misrepresentation. In his judgment, the judge clarified on the matter by stating that real misrepresentation is experienced when a husband prefers his interest to those of his wife.19 Bank of Credit & Commerce International v Aboody [1990] 1 QB 923 The case set out that there were three classes of undue influence and the first class known as (Class 1) is where there is actual undue influence. It requires proof that a c contract agreement was in place and due to that, actual undue influence was present. These includes situations where there are threats to terminate a relationship or when a partner continues to persist relentlessly until he/she gives in. In the case, the claimant was mandated to find relief by actual undue influence and had to show that they had suffered a manifest disadvantage. In the case, CIBC Mortgages v Pitt (1994) 1 AC 200, the precedent of manifest disadvantage was deemed not necessary in cases regarding actual undue influence.20 21The other category of undue influence is Class 2 a. Under this class, no requirements are necessary with regards to proving undue influence however, a relationship giving rise to presume undue influence and the presence of a transaction are mandatory. A good example is the case, National Westminster Bank v Morgan, where the court held that a customer and a banker did not have a relationship that could lead to trust meaning there was no presumption of undue influence, The last category is Class 2b where there is no presence of automatic presumption. There must be the establishment of a relationship where one party puts trust on the other partner that he/she is going to protect his interests. The relationship between a wife and a husband or the one between an employer and employee fits this description. Proof of trust is what distinguishes the classes 2 a and 2 b. Barclays Bank v Obrien fall under the class b. Lord Nichols developed principles that had earlier been used in English authorities by setting out specific guidelines that should be followed in relation to protecting the interest of both the lending financial institution and the spouse being protected from undue influence22. The steps include checking with the wife directly on the name of the solicitor23 that she wishes to act on his behalf, informing the wife of the need of the bank to acquire written confirmation from her solicitor in relation to the fact that she has been told of the implications and nature of the documents for surety.24 The bank is also required to provide the wife’s solicitor with detailed information regarding the husband’s financial position and have the wife explained to that by signing the documents she cannot claim to have been misled by her husband.25 The other step involves the bank informing the wife’s solicitor in case they suspect that the wife is being misled or coerced by her husband into entering the transaction. The bank should also obtain written documentation confirming the wife’s desire to continue with the transaction from the wife’s solicitor. Very high standards had been placed on financial institutions to prevent a spouse from being misrepresented or unduly influenced by the other spouse.26 In the Obrien case, the financial institutions were only mandated to inquire about the relationship between the surety and the debtor. It has been described as it being a modest obligation.27 The aim of constitutionalizing contract law is protecting the weaker party involved in a transaction.28 In the Obrien case, the case law was lax and there were still cases of misrepresentation29, however the strict rules set in place in the Etridge case, necessitate banks to follow stringent procedures in order that their right to rely on its security is not infringed and spouses are protected from undue influence when providing surety which provides more protection to a vulnerable surety.30 Bibliography Martini, S. (1994). Undue influence. New York: Putnam. Brookner, A. (1999). Undue influence: A novel .New York: Random House. Yastrow, S. (1990). 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