21 October 1993
My Lords, for the reasons to be given by my noble and learned friend, Lord Browne-Wilkinson I would dismiss the appeal.
My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Browne-Wilkinson. I agree with it and for the reasons he gives I too would dismiss the appeal.
My Lords, in this appeal your Lordships for the first time have to consider a problem which has given rise to reported decisions of the Court of Appeal on no less than 11 occasions in the last eight years and which has led to a difference of judicial view. Shortly stated the question is whether a bank is entitled to enforce against a wife an obligation to secure a debt owed by her husband to the bank where the wife has been induced to stand as surety for her husband's debt by the undue influence or misrepresentation of the husband.
The facts of the present case are very fully set out in the judgment of Scott L.J. in the Court of Appeal ( Q.B. 109). I will only state them in summary form. Mr. and Mrs. O'Brien were husband and wife. The matrimonial home, 151, Farnham Lane, Slough, was in their joint names subject to a mortgage of approximately £25,000 to a building society. Mr. O'Brien was a chartered accountant and had an interest in a company, Heathrow Fabrications Ltd. The company's bank account was at the Woolwich branch of Barclays Bank. In the first three months of 1987 the company frequently exceeded its overdraft facility of £40,000 and a number of its cheques were dishonoured on presentation. In discussions in April 1981 between Mr. O'Brien and the manager of the Woolwich branch, Mr. Tucker, Mr. O'Brien told Mr. Tucker that he was remortgaging the matrimonial home: Mr. Tucker made a note that Mrs. O'Brien might be a problem. The overdraft limit was raised at that stage to £60,000 for one month. Even though no additional security was provided, by 15 June 1987, the company's overdraft had risen to £98,000 and its cheques were again being dishonoured.
On 22 June 1987, Mr. O'Brien and Mr. Tucker agreed (1) that the company's overdraft limit would be raised to £135,000 reducing to £120,000 after three weeks (2) that Mr. O'Brien would guarantee the company's indebtedness and (3) that Mr. O'Brien's liability would be secured by a second charge on the matrimonial home.
The necessary security documents were prepared by the bank. They consisted of an unlimited guarantee by Mr. O'Brien of the company's liability and a legal charge by both Mr. and Mrs. O'Brien of the matrimonial home to secure any liability of Mr. O'Brien to the bank. Mr. Tucker arranged for the documents, together with a side letter, to be sent to the Burnham branch of the bank for execution by Mr. and Mrs. O'Brien. In a covering memorandum, Mr. Tucker requested the Burnham branch to advise the O'Briens as to the current level of the facilities afforded to the bank (£107,000) and the projected increase to £135,000. The Burnham branch was also asked to ensure that the O'Briens were "fully aware of the nature of the documentation to be signed and advised that if they are in any doubt they should contact their solicitors before signing."
Unfortunately the Burnham branch did not follow Mr. Tucker's instructions. On 1 July, Mr. O'Brien alone signed the guarantee and legal charge at the Burnham branch, the document simply being produced for signature and witnessed by a clerk. On the following day Mrs. O'Brien went to the branch with her husband. There were produced for signature by Mrs. O'Brien, the legal charge on the matrimonial home together with a side letter which reads:
"We hereby agree acknowledge and confirm as follows: (1) That we have each received from you a copy of the guarantee dated 3 July 1987 (a copy of which is attached hereto) under which Nicholas Edward O'Brien guarantees the payment and discharge of all moneys and liabilities now or hereafter due owing or incurred by Heathrow Fabrications Ltd. to you. (2) That the liability of the said Nicholas Edward O'Brien to you pursuant to the said guarantee is and will be secured by the legal charge dated 3 July 1987 over the property described above made between (1) Nicholas Edward O'Brien (2) Nicholas Edward O'Brien and Bridget Mary O'Brien and (3) Barclays Bank Plc. (3) That you recommended that we should obtain independent legal advice before signing this letter."
In fact the Burnham branch gave Mrs. O'Brien no explanation of the effect of the documents. No one suggested that she should take independent legal advice. She did not read the documents or the side letter. She simply signed the legal charge and side letter and her signature was witnessed by the clerk. She was not given a copy of the guarantee.
The company did not prosper and by October 1987 its indebtedness to the bank was over £154,000. In November 1987 demand was made against Mr. O'Brien under his guarantee. When the demand was not met, possession proceedings under the legal charge were brought by the bank against Mr. and Mrs. O'Brien. Mrs. O'Brien seeks to defend these proceedings by alleging that she was induced to execute the legal charge on the matrimonial home by the undue influence of Mr. O'Brien and by his misrepresentation. The trial judge, Judge Marder Q.C., and the Court of Appeal rejected the claim based on undue influence: on the appeal to this House the claim based on undue influence is not pursued. However the judge did find that Mr. O'Brien had falsely represented to Mrs. O'Brien that the charge was to secure only £60,000 and that even this liability would be released in a short time when the house was remortgaged. On those findings of fact, the trial judge granted an order for possession against Mrs. O'Brien holding that the bank could not be held responsible for the misrepresentation made by Mr. O'Brien.
The decision of the Court of Appeal
The Court of Appeal (Purchas, Butler-Sloss and Scott L.JJ.) reversed his decision. The leading judgment in the Court of Appeal was given by Scott L.J. who found that there were two lines of authority. One line would afford no special protection to married women: the rights of the creditor bank could only be adversely affected by the wrongful acts of the principal debtor, the husband, in procuring the surety's liability if the principal debtor was acting as the agent of the creditor in procuring the surety to join or the creditor had knowledge of the relevant facts. I will call this theory "the agency theory." The other line of authority detected by Scott L.J. (which I will call "the special equity theory") considers that equity affords special protection to a protected class of surety viz. those where the relationship between the debtor and the surety is such that influence by the debtor over the surety and reliance by the surety on the debtor are natural features of the relationship. In cases where a surety is one of this protected class, the surety obligation is unenforceable by the creditor bank if (1) the relationship between the debtor and the surety was known to the creditor (2) the surety's consent was obtained by undue influence or by misrepresentation or without "an adequate understanding of the nature and effect of the transaction" and (3) the creditor had failed to take reasonable steps to ensure that the surety had given a true and informed consent to the transaction. The Court of Appeal preferred the special equity principle. They held that the legal charge on the O'Brien's matrimonial home was not enforceable by the bank against Mrs. O'Brien save to the extent of the £60,000 which she had thought she was agreeing to secure.
The large number of cases of this type coming before the courts in recent years reflects the rapid changes in social attitudes and the distribution of wealth which have recently occurred. Wealth is now more widely spread. Moreover a high proportion of privately owned wealth is invested in the matrimonial home. Because of the recognition by society of the equality of the sexes, the majority of matrimonial homes are now in the joint names of both spouses. Therefore in order to raise finance for the business enterprises of one or other of the spouses, the jointly owned home has become a main source of security. The provision of such security requires the consent of both spouses.
In parallel with these financial developments, society's recognition of the equality of the sexes has led to a rejection of the concept that the wife is subservient to the husband in the management of the family's finances. A number of the authorities reflect an unwillingness in the court to perpetuate law based on this outmoded concept. Yet, as Scott L.J. in the Court of Appeal rightly points out  Q.B. 109, 139, although the concept of the ignorant wife leaving all financial decisions to the husband is outmoded, the practice does not yet coincide with the ideal. In a substantial proportion of marriages it is still the husband who has the business experience and the wife is willing to follow his advice without bringing a truly independent mind and will to bear on financial decisions. The number of recent cases in this field shows that in practice many wives are still subjected to, and yield to, undue influence by their husbands. Such wives can reasonably look to the law for some protection when their husbands have abused the trust and confidence reposed in them.
On the other hand, it is important to keep a sense of balance in approaching these cases. It is easy to allow sympathy for the wife who is threatened with the loss of her home at the suit of a rich bank to obscure an important public interest viz., the need to ensure that the wealth currently tied up in the matrimonial home does not become economically sterile. If the rights secured to wives by the law renders vulnerable loans granted on the security of matrimonial homes, institutions will be unwilling to accept such security, thereby reducing the flow of loan capital to business enterprises. It is therefore essential that a law designed to protect the vulnerable does not render the matrimonial home unacceptable as security to financial institutions.
With these policy considerations in mind I turn to consider the existing state of the law. The whole of modern law is derived from the decision of the Privy Council in Turnbull & Co. v. Duval  A.C. 429 which, as I will seek to demonstrate, provides an uncertain foundation. Before considering that case however, I must consider the law of undue influence which (though not directly applicable in the present case) underlies both Duval's case and most of the later authorities.
A person who has been induced to enter into a transaction by the undue influence of another ("the wrongdoer") is entitled to set that transaction aside as against the wrongdoer. Such undue influence is either actual or presumed. In Bank of Credit and Commerce International S.A. v. Aboody  1 Q.B. 923, 953, the Court of Appeal helpfully adopted the following classification.
Class 1: Actual undue influence
In these cases it is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned. Class 2: Presumed undue influence
In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. In Class 2 cases therefore there is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned: once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice. Such a confidential relationship can be established in two ways, viz.,
Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised.
Even if there is no relationship falling within Class 2(A), if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence. In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.
As to dispositions by a wife in favour of her husband, the law for long remained in an unsettled state. In the 19th century some judges took the view that the relationship was such that it fell into Class 2(A) i.e. as a matter of law undue influence by the husband over the wife was presumed. It was not until the decisions in Howes v. Bishop  2 K.B. 390 and Bank of Montreal v. Stuart  A.C. 120 that it was finally determined that the relationship of husband and wife did not as a matter of law raise a presumption of undue influence within Class 2(A). It is to be noted therefore that when the Duval case was decided in 1902 the question whether there was a Class 2(A) presumption of undue influence as between husband and wife was still unresolved.
An invalidating tendency?
Although there is no Class 2(A) presumption of undue influence as between husband and wife, it should be emphasised that in any particular case a wife may well be able to demonstrate that de facto she did leave decisions on financial affairs to her husband thereby bringing herself within Class 2(B) i.e. that the relationship between husband and wife in the particular case was such that the wife reposed confidence and trust in her husband in relation to their financial affairs and therefore undue influence is to be presumed. Thus, in those cases which still occur where the wife relies in all financial matters on her husband and simply does what he suggests, a presumption of undue influence within Class 2(B) can be established solely from the proof of such trust and confidence without proof of actual undue influence.
In the appeal in C.I.B.C. Mortgages Plc. v. Pitt (judgment in which is to be given immediately after that in the present appeal), post, p. 804C-D et seq., Mr. Price for the wife argued that in the case of transactions between husband and wife, there was an "invalidating tendency" i.e. although there was no Class 2(A) presumption of undue influence, the courts were more ready to find that a husband had exercised undue influence over his wife than in other cases. Scott L.J. in the present case also referred to the law treating married women "more tenderly" than others. This approach is based on dicta in early authorities. In Grigby v. Cox (1750) 1 Ves. Sen. 517 Lord Hardwicke, whilst rejecting any presumption of undue influence, said that a court of equity "will have more jealousy" over dispositions by a wife to a husband. In Yerkey v. Jones (1939) 63 C.L.R. 649, 675, Dixon J. refers to this "invalidating tendency." He also refers to the court recognising "the opportunities which a wife's confidence in her husband gives him of unfairly or improperly procuring her to become surety:" see p. 677.
In my judgment this special tenderness of treatment afforded to wives by the courts is properly attributable to two factors. First, many cases may well fall into the Class 2(B) category of undue influence because the wife demonstrates that she placed trust and confidence in her husband in relation to her financial affairs and therefore raises a presumption of undue influence. Second, the sexual and emotional ties between the parties provide a ready weapon for undue influence: a wife's true wishes can easily be overborne because of her fear of destroying or damaging the wider relationship between her and her husband if she opposes his wishes.
For myself, I accept that the risk of undue influence affecting a voluntary disposition by a wife in favour of a husband is greater than in the ordinary run of cases where no sexual or emotional ties affect the free exercise of the individual's will.
Undue influence, misrepresentation and third parties
Up to this point I have been considering the right of a claimant wife to set aside a transaction as against the wrongdoing husband when the transaction has been procured by his undue influence. But in surety cases the decisive question is whether the claimant wife can set aside the transaction, not against the wrongdoing husband, but against the creditor bank. Of course, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor. Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequentially of the wife's equity to set aside the transaction) the creditor will take subject to that equity and the wife can set aside the transaction against the creditor (albeit a purchaser for value) as well as against the husband: see Bainbrigge v. Browne (1881) 18 Ch.D. 188 and Bank of Credit and Commerce International S.A. v. Aboody  1 Q.B. 923, 973. Similarly, in cases such as the present where the wife has been induced to enter into the transaction by the husband's misrepresentation, her equity to set aside the transaction will be enforceable against the creditor if either the husband was acting as the creditor's agent or the creditor had actual or constructive notice. Turnbull & Co. v. Duval  A.C. 429
This case provides the foundation of the modern law: the basis on which it was decided is, to say the least, obscure. Mr. Duval owed three separate sums to a firm, Turnbull & Co., including £1,000 owed to the Jamaican branch for beer. Turnbulls' manager and agent in Jamaica was a Mr. Campbell. Mr. Campbell was also an executor and trustee of a will under which Mrs. Duval had a beneficial interest. Mr. Campbell threatened to stop supplying beer to Mr. Duval unless security was given for the debts owed and, with Mr. Campbell's knowledge, a document was prepared under which Mrs. Duval charged her beneficial interest under the will to secure the payment of all debts owed by Mr. Duval to Turnbull, i.e., not only the money owed for beer but all the debts. Mr. Duval put pressure on Mrs. Duval to sign the document. She was under the impression that the document was to secure the beer debt only.
The trial judge in the Court of Appeal in Jamaica held that the security document should be set aside as against Turnbulls on the sole ground that Mr. Campbell, as executor of the will, was in a fiduciary capacity vis-a-vis his beneficiary, Mrs. Duval, and his employers could not uphold the security document unless they could show that Mrs. Duval was fully aware of what she was doing when she entered into it and did it freely. The Privy Council dismissed Turnbulls' appeal, Lord Lindley expressing the ratio in these terms, at pp. 434-435:
"In the face of such evidence, their Lordships are of opinion that it is quite impossible to uphold the security given by Mrs. Duval. It is open to the double objection of having been obtained by a trustee from his cestui que trust by pressure through her husband and without independent advice, and of having been obtained by a husband from his wife by pressure and concealment of material facts. Whether the security could be upheld if the only ground for impeaching it was that Mrs. Duval had no independent advice has not really to be determined. Their Lordships are not prepared to say it could not. But there is an additional and even stronger ground for impeaching it. It is, in their Lordships' opinion, quite clear that Mrs. Duval was pressed by her husband to sign, and did sign, the document, which was very different from what she supposed it to be, and a document of the true nature of which she had no conception. It is impossible to hold that Campbell or Turnbull & Co. are unaffected by such pressure and ignorance. They left everything to Duval, and must abide the consequences."
The first ground mentioned by Lord Lindley (i.e. Campbell's breach of fiduciary duties) raises no problems. It is the second ground which has spawned the whole line of cases with which your Lordships are concerned. It raises two problems. The passage appears to suggest that Mr. Duval had acted in some way wrongfully vis-a-vis his wife, and that Turnbulls who "had left everything to Duval" were held liable for Duval's wrong. What was the wrongful act of Duval vis-a-vis his wife? Second, why did the fact that Turnbulls "left everything to Duval" render them unable to enforce their security?
Duval's case: was the husband in breach of duty to his wife?
Thanks to the industry of counsel, we have seen the case lodged on the appeal to the Privy Council. The pleadings contain no allegation of undue influence or misrepresentation by Mr. Duval. Mrs. Duval did not in evidence allege actual or presumptive undue influence. The sole ground of decision in the courts below was Campbell's fiduciary position. There is no finding of undue influence against Mr. Duval. No one appeared for Mrs. Duval before the Privy Council. Therefore the second ground of decision sprung wholly from the Board and Lord Lindley's speech gives little insight into their reasoning.
For myself I can only assume that, if the Board considered that Mr. Duval had committed a wrongful act vis-a-vis his wife, it proceeded on a mistaken basis. It will be remembered that in 1902 it had not been finally established that a presumption of undue influence within Class 2(A) did not apply as between husband and wife. The Board may therefore have been proceeding on the basis that the presumption of undue influence applied as between Mr. and Mrs. Duval. This was certainly one contemporary understanding of the ratio decidendi: see Bischoff's Trustee v. Frank (1903) 89 L.T. 188. Alternatively, the Board may have been mistakenly applying the heresy propounded by Lord Romilly to the effect that when a person has made a large voluntary disposition the burden is thrown on the party benefiting to show that the disposition was made fairly and honestly and in full understanding of the nature and consequences of the transaction: see Hoghton v. Hoghton (1852) 15 Beav. 278. Although this heresy has never been formally overruled, it has rightly been regarded as bad law for a very long time: see the account given by Dixon J. in Yerkey v. Jones, 63 C.L.R. 649, 678 et seq. It is impossible to find a sound basis for holding that Mrs. Duval was entitled to set aside the transaction as against her husband. How then could she set it aside as against Turnbulls?
Duval's case: Was the creditor under a direct duty to the wife?
It is the lack of any sound basis for holding that Mr. Duval was guilty of a legal wrong for which Turnbulls were indirectly held liable which has led to the theory that the creditor, Turnbulls, were themselves in breach of some duty owed by them as creditors directly to the surety, Mrs. Duval. No one has ever suggested that in the ordinary case of principal and surety the creditor owes any duty of care to the surety: in the normal case it is for the surety to satisfy himself as to the nature and extent of the obligations he is assuming. Therefore, it is said, there must be some special feature of the case where a wife stands surety for her husband's debt which gives rise to some special duty. This is the explanation of the decision of Duval's case given by Dixon J. in Yerkey v. Jones, 63 C.L.R. 649, 675, which, in turn, is the basis on which the Court of Appeal in the present case adopted the view that the law imposed on the creditor itself a duty to take steps to ensure not only that the husband had not used undue influence or made a misrepresentation but also that the wife had "an adequate understanding of the nature and effect" of what she was doing. If this interpretation of Duval's case is correct, the law not only imposes on the creditor a duty vis-a-vis a particular class of surety (where ordinarily there would be none) but the extent of that duty is greater than that which, under the ordinary law, a husband would owe to his wife: a transaction between husband and wife cannot, in the absence of undue influence or misrepresentation, be set aside simply on the ground that the wife did not fully understand the transaction. Duval's case: "They left everything to Duval and must abide the consequences."
These words provide the only guidance as to the circumstances which led the Board to set aside the surety agreement as against Turnbulls. In later cases the words have often been treated as indicating that Mr. Duval (but not Turnbulls themselves) acted in breach of duty to Mrs. Duval, that Mr. Duval was Turnbulls' agent and that Turnbulls could not be in a better position than its agent. Quite apart from the difficulty of identifying what was the breach of duty committed by Mr. Duval, the concept of Mr. Duval having acted as agent for Turnbulls to procure his wife to become surety for the debt was artificial in Duval's case itself and in some of the later cases becomes even more artificial. As the Court of Appeal in this case point out, in the majority of cases the reality of the relationship is that, the creditor having required of the principal debtor that there must be a surety, the principal debtor on his own account in order to raise the necessary finance seeks to procure the support of the surety. In so doing he is acting for himself not for the creditor.
The subsequent authorities
The authorities in which the principle derived from the Duval case has been applied are fully analysed in the judgment of Scott L.J. and it is unnecessary to review them fully again.
Scott L.J. analyses the cases as indicating that down to 1985 there was no decision which indicated that the agency theory, rather than the special equity theory, was the basis of the decision in Duval. I agree. But that is attributable more to the application of the Duval principle than to any analysis of its jurisprudential basis. The only attempts to analyse the basis of the decision in Duval's case were the Australian decisions in Bank of Victoria Ltd. v. Mueller  V.L.R. 642 and the judgment of Dixon J. in Yerkey v. Jones, 63 C.L.R. 649. The former decision was reached by applying the Romilly heresy which, as I have already said, is bad law. The judgment of Dixon J. undoubtedly supports the special equity theory.
From 1985 down to the decision of the Court of Appeal in the present case the decisions have all been based on the agency theory i.e. that the principal debtor has acted in breach of duty to his wife, the surety, and that, if the principal debtor was acting as the creditor's agent but not otherwise, the creditor cannot be in any better position than its agent, the husband. In all the cases since 1985 the principal debtor has procured the agreement of the surety by a legal wrong (undue influence or misrepresentation). In all the cases emphasis was placed on the question whether the creditor was infected by the debtor's wrongdoing because the debtor was acting as the agent of the creditor in procuring the wife's agreement to stand as surety. I am unable to agree with Scott L.J. that the decision in Kings North Trust Ltd. v. Bell  1 W.L.R. 119 was not based on the agency theory: Dillon L.J., at p. 123f-g, expressly makes it a necessary condition that the creditor has entrusted to the husband the task of obtaining his wife's signature.
However, in four of the cases since 1985 attention has been drawn to the fact that, even in the absence of agency, if the debtor has been guilty of undue influence or misrepresentation the creditor may not be able to enforce the surety contract if the creditor had notice, actual or constructive, of the debtor's conduct: see Avon Finance Co. Ltd. v. Bridger  2 All E.R. 281, per Brandon L.J., at p. 287e; Coldunell Ltd. v. Gallon  Q.B. 1184, 1201; Midland Bank Plc. v. Shephard  3 All E.R. 17, 23; Bank of Credit and Commerce International S.A. v. Aboody  1 Q.B. 923, 973. As will appear, in my view it is the proper application of the doctrine of notice which provides the key to finding a principled basis for the law.
Accordingly, the present law is built on the unsure foundations of the Duval case. Like most law founded on obscure and possibly mistaken foundations it has developed in an artificial way, giving rise to artificial distinctions and conflicting decisions. In my judgment your Lordships should seek to restate the law in a form which is principled, reflects the current requirements of society and provides as much certainty as possible.
My starting point is to clarify the basis of the law. Should wives (and perhaps others) be accorded special rights in relation to surety transactions by the recognition of a special equity applicable only to such persons engaged in such transactions? Or should they enjoy only the same protection as they would enjoy in relation to their other dealings? In my judgment, the special equity theory should be rejected. First, I can find no basis in principle for affording special protection to a limited class in relation to one type of transaction only. Second, to require the creditor to prove knowledge and understanding by the wife in all cases is to reintroduce by the back door either a presumption of undue influence of Class 2(A) (which has been decisively rejected) or the Romilly heresy (which has long been treated as bad law). Third, although Scott L.J. found that there were two lines of cases one of which supported the special equity theory, on analysis although many decisions are not inconsistent with that theory the only two cases which support it are Yerkey v. Jones, 63 C.L.R. 649, and the decision of the Court of Appeal in the present case. Finally, it is not necessary to have recourse to a special equity theory for the proper protection of the legitimate interests of wives as I will seek to show.
In my judgment, if the doctrine of notice is properly applied, there is no need for the introduction of a special equity in these types of cases. A wife who has been induced to stand as a surety for her husband's debts by his undue influence, misrepresentation or some other legal wrong has an equity as against him to set aside that transaction. Under the ordinary principles of equity, her right to set aside that transaction will be enforceable against third parties (e.g. against a creditor) if either the husband was acting as the third party's agent or the third party had actual or constructive notice of the facts giving rise to her equity. Although there may be cases where, without artificiality, it can properly be held that the husband was acting as the agent of the creditor in procuring the wife to stand as surety, such cases will be of very rare occurrence. The key to the problem is to identify the circumstances in which the creditor will be taken to have had notice of the wife's equity to set aside the transaction.
The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it. Therefore where a wife has agreed to stand surety for her husband's debts as a result of undue influence or misrepresentation, the creditor will take subject to the wife's equity to set aside the transaction if the circumstances are such as to put the creditor on inquiry as to the circumstances in which she agreed to stand surety.
It is at this stage that, in my view, the "invalidating tendency" or the law's "tender treatment" of married women, becomes relevant. As I have said above in dealing with undue influence, this tenderness of the law towards married women is due to the fact that, even today, many wives repose confidence and trust in their husbands in relation to their financial affairs. This tenderness of the law is reflected by the fact that voluntary dispositions by the wife in favour of her husband are more likely to be set aside than other dispositions by her: a wife is more likely to establish presumed undue influence of Class 2(B) by her husband than by others because, in practice, many wives do repose in their husbands trust and confidence in relation to their financial affairs. Moreover the informality of business dealings between spouses raises a substantial risk that the husband has not accurately stated to the wife the nature of the liability she is undertaking, i.e., he has misrepresented the position, albeit negligently.
Therefore in my judgment a creditor is put on inquiry 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.
It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife's agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife's rights.
What, then are the reasonable steps which the creditor should take to ensure that it does not have constructive notice of the wife's rights, if any? Normally the reasonable steps necessary to avoid being fixed with constructive notice consist of making inquiry of the person who may have the earlier right (i.e. the wife) to see whether such right is asserted. It is plainly impossible to require of banks and other financial institutions that they should inquire of one spouse whether he or she has been unduly influenced or misled by the other. But in my judgment the creditor, in order to avoid being fixed with constructive notice, can reasonably be expected to 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. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test. However for the future 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. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife's rights. I should make it clear that I have been considering the ordinary case where the creditor knows only that the wife is to stand surety for her husband's debts. I would not exclude exceptional cases where a creditor has knowledge of further facts which render the presence of undue influence not only possible but probable. In such cases, the creditor to be safe will have to insist that the wife is separately advised.
I am conscious that in treating the creditor as having constructive notice because of the risk of Class 2(B) undue influence or misrepresentation by the husband I may be extending the law as stated by Fry J. in Bainbrigge v. Browne, 18 Ch. D. 188, 197, and the Court of Appeal in the Aboody case  1 Q.B. 923, 973. Those cases suggest that for a third party to be affected by constructive notice of presumed undue influence the third party must actually know of the circumstances which give rise to a presumption of undue influence. In contrast, my view is that the risk of Class 2(B) undue influence or misrepresentation is sufficient to put the creditor on inquiry. But my statement accords with the principles of notice: if the known facts are such as to indicate the possibility of an adverse claim that is sufficient to put a third party on inquiry.
If the law is established as I have suggested, it will hold the balance fairly between on the one hand the vulnerability of the wife who relies implicitly on her husband and, on the other hand, the practical problems of financial institutions asked to accept a secured or unsecured surety obligation from the wife for her husband's debts. In the context of suretyship, the wife will not have any right to disown her obligations just because subsequently she proves that she did not fully understand the transaction: she will, as in all other areas of her affairs, be bound by her obligations unless her husband has, by misrepresentation, undue influence or other wrong, committed an actionable wrong against her. In the normal case, a financial institution will be able to lend with confidence in reliance on the wife's surety obligation provided that it warns her (in the absence of the husband) of the amount of her potential liability and of the risk of standing surety and advises her to take independent advice.
Mr. Jarvis, for the bank, urged that this is to impose too heavy a burden on financial institutions. I am not impressed by this submission. The Report by Professor Jack's Review Committee on Banking Services: Law and Practice (1989) (Cmnd. 622), recommended that prospective guarantors should be adequately warned of the legal effects and possible consequences of their guarantee and of the importance of receiving independent advice. Pursuant to this recommendation, the Code of Banking Practice (adopted by banks and building societies in March 1992) provides in paragraph 12.1 as follows:
"Banks and building societies will advise private individuals proposing to give them a guarantee or other security for another person's liabilities that: (i) by giving the guarantee or third party security he or she might become liable instead of or as well as that other person; (ii) he or she should seek independent legal advice before entering into the guarantee or third party security. Guarantees and other third party security forms will contain a clear and prominent notice to the above effect."
Thus good banking practice (which applies to all guarantees, not only those given by a wife) largely accords with what I consider the law should require when a wife is offered as surety. The only further substantial step required by law beyond that good practice is that the position should be explained by the bank to the wife in a personal interview. I regard this as being essential because a number of the decided cases show that written warnings are often not read and are sometimes intercepted by the husband. It does not seem to me that the requirement of a personal interview imposes such an additional administrative burden as to render the bank's position unworkable.
(b) Other persons
I have hitherto dealt only with the position where a wife stands surety for her husband's debts. But in my judgment the same principles are applicable to all other cases where there is an emotional relationship between cohabitees. The "tenderness" shown by the law to married women is not based on the marriage ceremony but reflects the underlying risk of one cohabitee exploiting the emotional involvement and trust of the other. Now that unmarried cohabitation, whether heterosexual or homosexual, is widespread in our society, the law should recognise this. Legal wives are not the only group which are now exposed to the emotional pressure of cohabitation. Therefore if, but only if, the creditor is aware that the surety is cohabiting with the principal debtor, in my judgment the same principles should apply to them as apply to husband and wife.
In addition to the cases of cohabitees, the decision of the Court of Appeal in Avon Finance Co. Ltd. v. Bridger  2 All E.R. 281 shows (rightly in my view) that other relationships can give rise to a similar result. In that case a son, by means of misrepresentation, persuaded his elderly parents to stand surety for his debts. The surety obligation was held to be unenforceable by the creditor inter alia because to the bank's knowledge the parents trusted the son in their financial dealings. In my judgment that case was rightly decided: in a case where the creditor is aware that the surety reposes trust and confidence in the principal debtor in relation to his financial affairs, the creditor is put on inquiry in just the same way as it is in relation to husband and wife.
I can therefore summarise my views as follows. Where one cohabitee has entered into an obligation to stand as surety for the debts of the other cohabitee and the creditor is aware that they are cohabitees: (1) the surety obligation will be valid and enforceable by the creditor unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor; (2) if there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the creditor has taken reasonable steps to satisfy himself that the surety entered into the obligation freely and in knowledge of the true facts, the creditor will be unable to enforce the surety obligation because he will be fixed with constructive notice of the surety's right to set aside the transaction; (3) unless there are special exceptional circumstances, a creditor will have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warns the surety (at a meeting not attended by the principal debtor) of the amount of her potential liability and of the risks involved and advises the surety to take independent legal advice.
I should make it clear that in referring to the husband's debts I include the debts of a company in which the husband (but not the wife) has a direct financial interest.
The decision of this case.
Applying those principles to this case, to the knowledge of the bank Mr. and Mrs. O'Brien were man and wife. The bank took a surety obligation from Mrs. O'Brien, secured on the matrimonial home, to secure the debts of a company in which Mr. O'Brien was interested but in which Mrs. O'Brien had no direct pecuniary interest. The bank should therefore have been put on inquiry as to the circumstances in which Mrs. O'Brien had agreed to stand as surety for the debt of her husband. If the Burnham branch had properly carried out the instructions from Mr. Tucker of the Woolwich branch, Mrs. O'Brien would have been informed that she and the matrimonial home were potentially liable for the debts of a company which had an existing liability of £107,000 and which was to be afforded an overdraft facility of £135,000. If she had been told this, it would have counteracted Mr. O'Brien's misrepresentation that the liability was limited to £60,000 and would last for only three weeks. In addition according to the side letter she would have been recommended to take independent legal advice.
Unfortunately Mr. Tucker's instructions were not followed and to the knowledge of the bank (through the clerk at the Burnham branch) Mrs. O'Brien signed the documents without any warning of the risks or any recommendation to take legal advice. In the circumstances the bank (having failed to take reasonable steps) is fixed with constructive notice of the wrongful misrepresentation made by Mr. O'Brien to Mrs. O'Brien. Mrs. O'Brien is therefore entitled as against the bank to set aside the legal charge on the matrimonial home securing her husband's liability to the bank.
For these reasons I would dismiss the appeal with costs.
LORD SLYNN OF HADLEY.
My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Browne-Wilkinson. For the reasons he gives, I agree that this appeal should be dismissed.
My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Browne-Wilkinson. I agree with it and for the reasons he gives I, too, would dismiss the appeal.
Appeal dismissed with costs.
Crown Copyright acknowledged
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