Undue Influence of Another

Banking Law

In this essay I will be explaining notice, actual or constructive undue influence I will also be critically discussing the following statement,

“….if the creditor bank has notice, actual or constructive, of undue influence exercised by the husband (and consequently 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…as well as against the husband.” (Per Lord Browne- Wilkinson in Barclays Bank plc v O Brien (1994) 1 AC 180 at 191)

Undue influence is where a person who has been induced to enter into a transaction by the undue influence of another is entitled to set that transaction aside as against the wrongdoer. Such undue influence is either actual or presumed….

“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 called into question.

“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 presumed undue influence 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:

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 (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 (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 called into question.”

Constructive Notice

If a party is induced by the undue influence of a party to enter into a transaction with a third party, the complaining party may be able to set aside the transaction if the third party had actual or constructive notice of the undue influence. For example, if a wife agrees to provide security for the debts of her husband by allowing a charge to be taken over her share of the equity in the matrimonial home, a bank should make reasonable enquiries to satisfy itself that the wife’s agreement to this transaction has been properly obtained, usually by the wife obtaining independent legal advice, otherwise the bank maybe considered on constructive notice of undue influence.

Moving forward to Lord Browne-Wilkinson in Barclays Bank plc v O Brien (1994) according to him According to Lord Browne-Wilkinson, the bank is put on inquiry where the transaction is financially disadvantageous to the surety and there is a substantial risk that some wrongdoing may have been committed by the husband in procuring her consent to the transaction. The inclusion of the first factor suggests that the surety must establish manifest disadvantage at two stages in order for the O’Brien principle to come into play. This however raises the question of whether the obvious disadvantage requirement in presumed undue influence cases and the disadvantage are the same.

It assists the complainant in establishing her claim against the wrongdoer in a case of presumed undue influence; and (ii) it is relevant to the way in which the transaction appears to a third party and thus assists her in establishing that the third party had constructive notice of the impropriety. Once the bank is put on inquiry, the bank will be required to take reasonable steps to satisfy itself that the surety’s consent has been obtained properly in order for the transaction to stand. The purpose of the reasonable steps appears to be twofold: first, to bring home to the surety the risk that she is running in standing surety and second, to advise her to take independent legal advice.

Lord Browne-Wilkinson further suggested that it would be essential for the bank to hold a private meeting with the surety, in the absence of her husband, at which she is told the extent of her liability, warned of the risk that she is taking and is urged to take independent legal advice. It was however noted without criticism by the Court of Appeal in Etridge (No. 2) that most banks have avoided taking up Lord Browne-Wilkinson’s suggestion of a private meeting with the surety and have preferred instead the independent legal advice route.

There appears to be a tacit acceptance by the Court of Appeal that, notwithstanding Lord Browne-Wilkinson’s view that a private meeting is essential, such a meeting between the bank and the surety is but an alternative to the reasonable step of urging her to take independent legal advice. In getting the surety to obtain independent legal advice, the bank will be able to limit their responsibility for any wrongdoing on the part of the debtor in these cases. Thompson in fact argues that the approach taken by the Court of Appeal in Etridge (No. 2) suggests that it would be unwise for a bank to follow Lord Browne-Wilkinson’s guidelines and that the bank would be better advised to simply tell the surety to obtain legal advice from a solicitor.

Where the solicitor is not so satisfied his duty must be to advise the surety not to enter the transaction and to refuse to continue acting for her in the matter if she persists in doing so. This approach thus points to the solicitor’s duty to advise being satisfied only where the advice is sufficient to ensure that the surety’s consent is both informed and of her own free will. More importantly, this formulation of the solicitor’s duty clearly shifts the responsibility from banks to solicitors whereby a solicitor is now faced with the more onerous task of probing into his client’s relationship to ascertain the possibility and extent of a relationship of influence that may compromise her consent. Banks are more likely to succeed in enforcing the security once the surety has been told to obtain independent legal advice and any deficiency in the advice given will not impeach the transaction. The only recourse the surety will have is against her solicitor.

The decision in Barclays Bank v O’Brien in 1994 was hailed as a landmark for sureties, who may be described as vulnerable. It provides for a surety transaction to be set aside where it is established that the bank had notice, whether actual or constructive, of the transaction having been procured through some wrongdoing by the debtor, for example undue influence or misrepresentation. In order to avoid being fixed with notice, O’Brien further states that banks would be required to take “reasonable steps”, of which the “independent legal advice” requirement has taken centre stage. The aim of the independent legal advice is to rebut the presumption of undue influence or any other wrongdoing and to ensure that the consent given by the surety is of her independent free will.

While Lord Browne-Wilkinson did concede that some of the earlier cases had shown a special care to married women, that was attributable to two factors: first, that the wife would, in most instances, be able to demonstrate that she has placed trust and confidence in her husband in financial matters; and second, that the sexual and emotional ties between the parties would render the wife more vulnerable to abuse of that trust and confidence. He nevertheless, goes on to state that the special equity theory should be rejected for the following reasons. Firstly, there was no basis for affording special protection to a limited class in relation to one type of transaction only. Secondly, the approach would require proof by the bank that the surety had knowledge and understanding of the nature and effect of the transaction, so as not to be bound by her equity to set aside the transaction.

Therefore, following Lord Browne-Wilkinson’s formulation, the O’Brien principle may be stated as follows: if a wife were to stand surety for her husband’s debts as a result of undue influence, misrepresentation or some other legal wrong by the husband, the bank will take subject to her equity to set aside the transaction if the circumstances are such as to put the bank on inquiry as to the circumstances in which she had given her consent. The bank will be put on inquiry by a combination of two factors: (a) the transaction is not on its face to the financial advantage of the surety; and (b) there is a substantial risk in transactions of that kind that the husband may have committed a legal or equitable wrong in procuring the surety’s consent which entitles her to set aside the transaction. The security provided will not be enforceable by the bank, unless it has taken reasonable steps to satisfy itself that the surety’s consent had been properly obtained. In order for the principle to apply, the surety will have to establish an initial wrongdoing by the husband so as to acquire equity to set aside the transaction. Where she alleges that the transaction was procured by undue influence, she must either prove that actual undue influence had been exerted on her or raise the presumption.

To raise the presumption, the surety must establish, firstly, the existence of a relationship where she reposes trust and confidence in the husband in financial matters and secondly, that the transaction is manifestly disadvantageous to her. Once the surety establishes her equity to set aside the transaction, the question of whether the bank would be bound by her equity will depend on whether the circumstances are such that the bank is rightly treated as having been put on inquiry.

There is only actual or express undue influence and the burden of proof will be on the complaining party. Accordingly, a complaining party must provide clear evidence of such undue influence in order to prove the complaint. Banks are very important when it comes to claims of undue influence because they have to make the necessary enquiries to prove that the wife’s agreement to the transaction is properly obtained and of independent free will.