Undue Influence in Mortgages

Question 1

The problem of surety

Answer 1

• Where somebody guarantees the debt of another person
  
  • The person who guarantees the debt does not receive the benefit
• High proportion of privately-owned wealth tied up in the matrimonial home
• Where A enters into a transaction with C, but
  
  • A was induced into doing so by a legal wrong committed by B
  • The contract is not for A’s benefit but for B’s
• Contract can only be set aside if
  
  • In procuring A’s consent, B had acted as an agent of C (B and C were colluding), or
  • If C had actual or constructive notice of B’s wrongful act
  • And, in either case, if A did not benefit directly from the transaction
• Since the banks are innocent, the courts are slow to set aside a contract against an innocent party
  
  • This will only be done if C can be implicated through actual or constructive notice

Question 2

Pre-1994

BCCI v Aboody

Answer 2

• The agreement was incomplete, and Aboody could not have known what she was signing
• LJ Slade ruled that
  
  • Either C had entrusted B to obtain A’s signature so that B was C’s agent
  • Or C actually knew of B’s UI and the contract was to the manifest disadvantage of A (on the face of the bargain, it looks like she does not get anything – he is getting money and she is putting up her home)
• C actually had to know, which they did
• Mrs A did not want to sign the contract, after which Mr A shouted at her to make her sign. C had actual notice because they heard Mr A shouting at Mrs A, and they saw Mrs A crying

Question 3

Post-1994 but before 2002

Barclays v O’Brien

Answer 3

TWO STEPS: Claim of UI and Notice

1. Claim of undue influence

• Actual UI
• Presumed UI
  
  • Certain relationships that raise the presumption (doctor/patient; solicitor/client …)
  • Any other relationship, e.g. H&W where the complainant has reposed trust and confidence in the wrongdoer
• At first the duty is on the claimant to show that she reposed trust and confidence in her husband to receive the money. Then the burden shifts to the mortgagee to show that she had gotten an advantage out of it
• Lord Browne-Wilkinson notes that wives are particularly vulnerable to being subject and victim to their husbands’ threats

2. Notice
   * Where on person stands surety (i.e. guarantees the debt of another) in non-commercial dealings, the bank is ‘on inquiry’

Question 4

RBS v Etridge

FACTS

Answer 4

The solicitor had confirmed falsely to the bank that he had independently advised the wife about her position. Because the bank had received confirmation from the solicitor, they were not under any notice

Question 5

RBS v Etridge

RULING

Answer 5

• You cannot get an honest answer to the question of undue influence
• Per Lord Nicholls: ‘on inquiry’ means it is reasonable for the bank to think that there is a risk that A does not understand the transaction
• Problem with manifest disadvantage
  
  • A wife standing surety for her husband’s debt is not a manifest disadvantage because there are intertwined interests
  • The court rejects the term manifest disadvantage; instead, the requirement is that the transaction is explicable only by undue influence
• Notice in this context is not of a proprietary right but of the lack of valid consent, the bank cannot ‘discover’ anything by making inquiries
• The court institutes the Etridge protocol
  
  • The bank can take steps to ensure that W is aware of the implications of her actions
• What is the bank’s reasonable perception of the circumstances?

Question 6

CIBC Mortgages v Pitt

FACTS

Answer 6

Both husband and wife tell the bank that the money is to buy a holiday home, but it is really for the husband to speculate on the stock market (the wife is being unduly influenced). The wife made a claim of UI, but the bank was not bound because they did not have notice

Question 7

CIBC Mortgages v Pitt

HELD

Answer 7

The disadvantage to the claimant must be manifest (need explaining)

Question 8

After Etridge

Answer 8

• The burden is on A to show that she trusted B and that the transaction was not to her advantage
• The burden then shifts to B to counter the inference
  
  • B is unlikely to do so, so C must show that it had protected itself

Question 9

Etridge Protocol

Answer 9

• The lender must communicate directly with A (the guarantor)
• The lender must get written confirmation from the solicitor
• They must explain to A why this is necessary
• They must only proceed with the transaction once A’s solicitor confirms in writing
  
  • First National Bank v Achampong: the mere knowledge that A has a solicitor acting for them is not constitute. If you do not get written confirmation, the security is at risk

Question 10

Result of a successful claim

Answer 10

• TSB v Camfield: “all or nothing” approach
  
  • The contract is set aside as against A in its entirety
• The initial loan is for a certain amount, and the husband unduly influences (or behind the wife’s bank) extends the loan to a much higher amount. The agreements are deemed to be a single agreement, Camfield applies and the whole amount is set aside as against the claimant
• Barclays Bank v Caplan: if agreements for original amount and increase are separable, then A’s interest may still be charged with original amount
  
  • If the agreements are separable, then the wife may still be liable to the original amount