CONTRACT LAW L4 - Duress & Undue Influence - UNDUE INFLUENCE & THIRD PARTIES

Question 1

What may arise in the context of marital relationship and undue influence? (2)

Answer 1

The victim is persuaded to enter into a guarantee or surety contract with a bank or some other creditor on the basis of some undue influence, misrepresentation or other legal wrong, not by the bank or creditor, but by a third party e.g. spouse.

Question 2

What is important to note when considering if a spouse has exercised undue influence over the other spouse? (4)

Answer 2

That the relationship between spouses is not one where there is an irrebuttable presumption of a relationship of influence / ascendancy. So, this will need to be proven and a spouse offering interest in the matrimonial home as security for a loan to their spouse’s business is not a transaction that requires explanation. It will be for the party offering security to show more explicitly how their spouse’s influence has been used unduly.

Question 3

What does the case of BARCLAYS BANK PLC V O’BRIEN 1994 demonstrate? (8)

Answer 3

The frequent tripartite problem involving spouses and a bank.
Mr O’Brien was a shareholder in a company and wanted to increase the overdraft facility of the company in question and the company’s bank agreed a loan of £12,000 that was to be guaranteed by Mr O’Brien and was jointly owned by him and his wife.
The bank manager gave instructions for a legal charge and guarantee to be signed by Mr O’Brien and instructed him to make his wife aware of the nature of the transactions and if any doubts to obtain independent legal advice.
When the company’s indebtedness increased beyond the agreed limit, the bank took proceedings to enforce its security against husband and wife.
Mrs O’Brien contended that her husband had put undue pressure on her to sign the agreements and that her husband misrepresented the effect of the legal charge in that she believed it was limited of a sum of £60,000 over 3 weeks when in fact the charge covered £135,000.
It was held by the House of Lords, that the bank was aware that the parties were husband and wife and as such were put on notice that influence may be exercised.
The bank failed its duty to take reasonable steps to warn the wife of the risks she ran in entering into the surety contract nor had it properly advised her to seek independent legal advice.
The bank was fixed with constructive notice of the misrepresentation made by the husband to induce his wife into the surety contract so she was entitled to have the legal charge set aside.

Question 4

What did Lord Nicholls state when asked to consider this area of law in the consolidated appeal of RBS V ETRIDGE? (1)

Answer 4

The only practical way forward is to regard banks as put on inquiry in every case where the relationship between surety and debtor is non-commercial.

Question 5

What happens if a bank is put on inquiry? (1)

Answer 5

Whenever one party is non-commercial setting is standing as surety for the other party this is shown in CIBC MORTGAGES PLC V PITT 1994.

Question 6

What does the case of CIBC MORTGAGES PLC V PITT 1994? (3)

Answer 6

The husband used borrowed money to speculate on the stock market crash, losing everything in the 1987 stock market crash.
The wife sought to have the mortgage on the matrimonial home set aside on the grounds of undue influence, having signed the mortgage without reading it under pressure from her husband.
The House of Lords rejected her claim as the husband had not been acting as the lender’s agent and the lender had no actual or constructive notice of the husband’s undue influence.

Question 7

What are the reasonable steps as set aside by Lord Nicholls in Etridge? (3)

Answer 7

1. There is no obligation on the creditor to have seen itself as it is ordinarily reasonable to rely on a confirmation from a solicitor that they have been advised the wife in an appropriate manner, unless the creditor is aware that this has not been done. It is for the determine whether there is a COI if the wife’s solicitor also advises her husband.
2. The creditor must provide with the solicitor with sufficient information about the transaction for the solicitor to be able to explain it fully to the wife.
3. If the creditor is aware, either actually or constructively, that the wife may have been misled, then the creditor must tell the solicitor of this.

Question 8

According to Lord Scott in Etridge, if the wife consents to legal advice then the minimum advice should contain? (3)

Answer 8

1. An explanation of the documents and their practical consequences
2. The seriousness of the risk, including the duration and terms of the security and the wife assets and means.
3. The fact that the wife has a choice.