For Richer For Poorer Until Debt Do Us Part

Seven years on from Barclays Bank plc v O'Brien the Law Lords, on 10 October 2001, revisited undue influence in Royal Bank of Scotland plc v Etridge (No.2) [2001] UKHL 44. Lord Nicholls set out a new blueprint for solicitors and bankers advising those who give security for the debts of another, and provided a review of basic principles.

What is undue influence?

Undue influence is the term used to describe the relief developed by the courts of equity to protect those who enter into transactions as a result of the improper influence of another. Since 1990 the courts and lawyers have used the labels "Class 1" and "Class 2" to distinguish between cases of actual undue influence (Class 1) and cases where undue influence is presumed from proof of a relationship of trust and confidence and manifest disadvantage to the complainant (Class 2).

Class 2 is sub-divided between:

Class 2A - where certain prescribed relationships give rise to an irrebutable presumption of trust and confidence and

Class 2B - where the complainant has to prove the relationship.

Once undue influence is established the relief usually comprises setting aside the transaction.

The lender and undue influence

The substantial recent interest in undue influence cases is in respect of Class 2 cases, and in particular those where a wife stands surety or provides other security for her husband's indebtedness to a lender. In such cases the lender is put on inquiry as to the risk of undue influence and will be fixed with notice of the wife's equity to set aside the transaction if it fails to make reasonable inquiries to allay such suspicions.

In O'Brien the House of Lords set out the steps that a lender put on inquiry should take in order to ensure that it is not affected by any claim that the wife's agreement was procured by undue influence. Lord Browne-Wilkinson said that a bank 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 legal advice. The bank were to do this at a private meeting with the wife and without the husband present.

The problem

Banks did not adopt this. For the most part they continued to require the wife to obtain independent legal advice and provide written confirmation that she had done so. The courts subsequently approved this course - it was sufficient that the bank had urged the wife to take independent advice, particularly if the solicitor had confirmed that she had done so to the bank. Further, the bank did not (ordinarily) need to concern itself with the sufficiency of the legal advice.

In the Etridge (No.2) appeals there was much criticism of the sufficiency of the legal advice given to wives in these transactions. They alleged that it was perfunctory in the extreme and the system was a charade which provided little or no protection to them.

The Court of Appeal's decision in Etridge (No.2)

The Court of Appeal outlined in some detail the law applicable to the various elements of undue influence surety claims. In dealing with the question of legal advice they went significantly further than expected. The solicitor not only had to ensure that the wife understood the nature and effect of the transaction, but also had to satisfy himself that she was free from improper influence. If the transaction was not one which she could sensibly be advised to enter if free from any undue influence then the solicitor's duty was to advise her not to enter into it. If she declined to accept the advice the solicitor was to refuse to act any further for her. He should then inform the bank and other parties that he had seen his client...

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