Undue influence and the joint borrower: a refresher

 

A recent case led me to revisit the question whether a bank can be fixed with the effect of undue influence exercised by a husband over his wife (or wife over husband, but the former is more common) leading her to take on a joint liability to the bank with the husband.

As we all should know, the effect of Royal Bank of Scotland v Etridge (No. 2) [2002] 2 AC 773 and the cases that preceded it is that a lender is put on inquiry if S stands surety for B and their relationship is non-commercial (for stand surety, read guarantee or give security for B’s debts). If the bank is on inquiry and S later proves that her agreement to stand surety for B’s debts was procured by B’s undue influence over her, the bank will be on constructive notice of the undue influence if it had not taken the necessary steps to satisfy itself that S had received appropriate independent legal advice before entering into the transaction. If the lender is on constructive notice of the undue influence then S will be entitled to have the guarantee and/or security set aside (subject to any defences available to the lender such as affirmation, acquiescence or the like).

That the transaction was procured by B’s undue influence can be proved simply by showing that S placed trust and confidence in B in relation to the management of B’s financial affairs, coupled with a transaction which calls for explanation. Absence evidence to the contrary the court will infer from that combination of factors that the transaction was induced by undue influence.

What if S does not merely stand surety, however? What if she and B jointly borrow money from the lender as a result of B’s undue influence over her, for example by seeking a substantial overdraft on an account in S and B’s joint names, secured on their jointly owned home? Can the bank be fixed with the effects of B’s undue influence then? Not, it has been held, unless the bank is aware that the loan is being made solely for B’s purposes.

In CIBC Mortgages plc v Pitt [1994] 1 AC 200, the House of Lords considered the case of a joint loan to Mr and Mrs P secured on their home. So far as the bank knew, the purpose of the loan was in part a remortgage and in part for Mr and Mrs P to buy a second home. In fact Mr P had persuaded Mrs P to let him borrow the money in order to speculate on the stock exchange (which presumably he did not do very well). The House of Lords held that the bank had no notice of the undue influence. It had no reason to think that the loan was anything other than a normal advance to husband and wife for their joint benefit. So it was not put on inquiry and could not be fixed with the consequences of Mr P’s undue influence over Mrs P.

Confirming this, in Etridge (No. 2), Lord Nicholls said in para. 48,

“As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband’s debts is, in this context, a straightforward case. The bank is put on inquiry. On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband’s purposes, as distinct from their joint purposes.”

Another commonplace situation that often arises is where husband and wife are both shareholders in a company in which only the husband plays an active part. Is the bank put on inquiry if the wife stands surety for the company’s debts? One may think that this situation is more analogous to a joint loan to the wife than it is to the wife standing surety for the husband’s debts. But the House of Lords in Etridge (No. 2) held that the bank was put on inquiry in that situation, even if the wife was a director of or company secretary of the company and even where she has an equal shareholding with her husband (see Lord Nicholls’ speech at para. 49).

So, if instructed by someone facing possession proceedings who complains that their spouse improperly induced them to charge the matrimonial home to raise money for the spouse’s business, it is important to consider the nature of the obligation that the client undertook to the bank.

If the client agreed to a charge over her home to secure debts in her husband’s sole name or the debts of a company run by her spouse, then, even though she may have been a shareholder and officer of the company, the bank will have been put on inquiry, with the consequences described above.

On the other hand, if the secured loan was made to the client as well as her spouse (in name at least), it will have to be shown that the bank knew that the money was really being advanced for the spouse’s benefit, not for their joint benefit, if a case of undue influence is to succeed against the bank. If the spouse’s business provided the income for the client as well as the spouse to live on, the court is quite likely to hold that the money was advanced for their joint benefit. See, for example, Legatt v National Westminster Bank (2000) 81 P & CR 432, CA. In those circumstances, the bank will never have been put on inquiry. However unduly the spouse may have influenced the client into entering into the loan/guarantee/charge, the bank will be able to enforce it against both of them.

Daniel Gatty
Hardwicke Building