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March 2011

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Case name	Royal Bank of Scotland Plc v Chandra
Neutral citation	[2011] EWCA Civ 192
Legal points	Bank guarantee and mortgage – undue influence and misrepresentation
Facts	Mr & Mrs C owned a company which was engaged in the development of a hotel with funds provided by RBS, secured by way of a debenture and a guarantee from Mr & Mrs C together with a charge over their matrimonial home, signed on 30 October 2001. They subsequently signed a second guarantee on 20 May 2003. As costs increased Mr & Mrs C ran into funding difficulties and were unable to pay their main contractor. The bank made formal demand and appointed administrative receivers over the business and assets of the company. In order to complete the development, the Receivers incorporated a separate company – a special purpose vehicle – who agreed to carry on the business of the company and whose liabilities to the contractor were guaranteed by RBS. RBS continued to fund the development through the company in receivership thereby enabling the receivers to settle the contractor’s claims and enable the development to be completed. The property was ultimately sold leaving a shortfall of over £4M. RBS sought to enforce the guarantees by claiming a money judgment and possession of the matrimonial home. Mr & Mrs C, who were separately represented, sought to defend the proceedings on a number of grounds – they challenged the arrangements entered into by the SPV and the company whereby the liabilities of the company was increased as a sham; they alleged that RBS were in breach of the equitable duty it owed Mr & Mrs C as guarantors; and they alleged a sale of the completed development at an undervalue. In addition, Mrs C raised a defence of undue influence, in respect of both (1) the guarantee and mortgage signed on 30 October 2001, and (2) the further guarantee signed on 20 May 2003. At first instance, the trial judge (David Richards J sitting as the Vice-Chancellor of the County Palatine of Lancaster) upheld the claim by RBS to enforce the personal guarantee and legal charge entered into on 30th October 2001, but upheld Mrs C’s claim in respect of the second guarantee. His decision is reported at [2010] EWHC 105 (Ch) Mrs C appealed against the judge’s decision in respect of the first guarantee. She alleged: (1) That Mr C had misled her about the costs involved by representing that extra funding from RBS of £700,000 would be sufficient to complete the hotel, when he could not be confident that there would not be any further costs overruns. She argued that this was both a material misrepresentation and an abuse of trust and confidence even if made in good faith. (2) That in respect of constructive notice, since the guidelines in Royal Bank of Scotland Plc v Etridge (No.2) [2002] AC 773 were handed down 19 days before the execution of the first guarantee and legal mortgage, and were intended to apply to future transactions, RBS had failed to comply with them.
Held	In respect of issue (1) – undue influence, it was accepted that the giving of a guarantee by a wife in respect of the debts of a company which she owns jointly with her husband is not of itself a transaction which calls for an explanation so that it is not to be presumed to have been procured by undue influence. As to whether, on the particular facts, a relationship of trust and confidence had been established, this ordinarily involves an examination of the nature of the alleged undue influence, the relationship between the parties and the scale and nature of the transaction. The trial judge held that a relationship of trust and confidence had been established on the particular facts but that there had been no abuse of that trust and confidence principally because Mr C genuinely believed that the further £700,000 would be enough to complete the development. A relationship of trust and confidence is recognised in equity as being fiduciary in nature, and will be the source of various fiduciary duties including an obligation to act in good faith and to avoid conflicts of interest ands duty. The defining characteristic of a fiduciary relationship is loyalty: a fiduciary who acts negligently but in good faith is not unfaithful and commits no equitable wrong (Bristol & West Building Society v Mothew [1998] Ch 1 at p 18F). The judge’s finding that Mr C’s statement that £700,000 was understood as a forecast or best estimate of future expenditure meant that it had to be treated by Mrs C as subject to an obvious reservation about its accuracy. That view was shared by others, despite the fact that it turned out to be wrong. There was accordingly no breach of fiduciary duty. Nor did Mr C give his wife an inaccurate explanation of the transaction While the categories of undue influence are not closed, for a person’s conduct to fall into this category must, on established principles, make it unconscionable for that person any who have notice of his conduct to seek to rely on the effect of what has been done - Etridge. Conscious deception obviously satisfies this test as does an abuse of confidence in the form of a breach of loyalty or good faith. The language of the decided cases is replete with references to abuse of trust, exploitation and domination of the injured party. All of these characterise some conscious act of wrong-doing on the fiduciary’s part. But it is much more difficult to apply these notions to cases of innocent misrepresentation where the highest it can be put is that more care should have been taken in giving the information or advice which was relied on. The Vice-Chancellor was right to reject Mrs C’s claim based on undue influence and misrepresentation. It followed that the second ground of appeal involving the question of constructive notice did not arise. Appeal dismissed.
Comment	This is a useful decision on the relationship between claims based on undue influence and misrepresentation. Undue influence is concerned with an abuse of trust of confidence, which gives rise to fiduciary duties, in particular, a duty of loyalty. An inaccurate explanation of a proposed transaction is different. Both involve questions of fact based on the evidence. As Lord Nicholls said in Etridge at para 32, “When a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be only natural. Courts should not too readily treat such exaggerations as misstatements”. The first instance decision is reported in the February 2010 Archive

Case name	Kojima v HSBC Bank Plc
Neutral citation	[2011] EWHC 611 (Ch)
Legal points	Public interest – finality of orders – application to withdraw admissions
Facts	HSBC made a loan to K which it sought to recover with interest. When filing his acknowledgment of service K admitted liability in part but disputed the balance. HSBC applied for judgment for the admitted sum. In order to avoid K’s career being adversely affected by a county court judgment, the District Judge ordered that unless K executed a charge to HSBC as security for the admitted sum, HSBC should be at liberty to enter judgment for that amount. K was subsequently advised he had a defence to HSBC’s claim and applied (1) to withdraw his admission; (2) to revoke the District Judge’s order; (3) to amend his Defence to the claim; and (4) to plead a Counterclaim. The application was dismissed by the Circuit Judge. K appealed, contending that in an appropriate case, the court should be ready to revoke even its own final orders to put right an injustice to a litigant who had admitted a claim and submitted to judgment before discovering with legal advice that he had a defence to the claim.
Held	The court had a discretion to permit a party to withdraw an admission under CPR PD 14 para 7, but the jurisdiction was likely to arise during the proceedings and may be regarded as spent once there had been a final determination of the claim. Consequently, K had to apply to revoke the order, and again, the court had jurisdiction to do so under CPR 3.1(7) having regard to the overriding objective. Having regard to authority, once the court has finally determined a case there is an overriding public interest in finality, subject to the dissatisfied party’s qualified right to appeal. A judgment on admissions is a judgment on the merits and the other party is in principle entitled to assume that, barring any appeal, there is an end to the matter. Lloyds Investment (Scandinavia) Ltd v Ager-Hanssen [2003] EWHC 1740 (Ch) and Roult v North West SHA [2009] EWCA Civ 444 considered.
Comment	This is not a mortgage case, but it does raise an important issue which can arise in claims for possession and a money judgment. If a claim is admitted and it leads to a final order being made, the prospect of setting aside the order and withdrawing the admission is very limited, even though, as in this case, the defendant was a litigant in person at the time he made the admission.

Case name	Lombard North Central Plc v Hussein
Neutral citation	(Unrep) QBD (Admiralty Court) 24 Jan 2011
Legal points	Service of proceedings by contractually agreed method in mortgage deed
Facts	H obtained a marine mortgage from L secured on a vessel. The mortgage agreement specified an address for service of notices. Having breached the mortgage agreement, H surrendered possession of the vessel and it was sold at a shortfall. L commenced proceedings for the balance. L’s solicitors filed a certificate of service of the claim form, particulars of claim and response pack at H’s address specified in the mortgage agreement. H failed to file an acknowledgment of service or defence and L obtained judgment in default. H subsequently applied to set aside judgment under CPR 13.3 on the ground (amongst others) that the address to which the claim form etc was sent was not his actual residential address, so that the certificate of service was invalid.
Held	Service was good at the address specified in the mortgage agreement, since this was intended to be used for the purposes of any proceedings arising out of the agreement. Alternatively, it would be contrary to the overriding objective if a party who had given a clear indication of an address which could be used for the service of documents to be able to avoid a judgment purely on the basis that this was not his actual residential address. Although in principle H had a cause of action arising out of the sale of the vessel at an undervalue his failure to plead a case and produce evidence was fatal to his claim for discretionary relief under CPR 13.3. Application dismissed.
Comment	Subject to the actual terms of the mortgage agreement, a lender can serve documents at an address specified for that purpose in the mortgage agreement irrespective of whether the borrower lives there. See CPR 6.11 – service by a contractually agreed method As a sensible practical precaution however, it would be wise to attempt service at the borrower’s usual or last known residence pursuant to CPR 6.9.

Legislation	Secured Lending Reform Bill 2011
	This is a private members bill which was presented to Parliament on 30th June 2010 and is due for its second reading in the House of Commons on 10th June 2011. It proposes significant amendments to: • Section 109 Law of Property Act 1925 by inserting new provisions which restrain a receiver appointed under the Act from bringing proceedings for possession of any property; exercising a right of peaceable re-entry; or conducting the sale of a property or receiving the proceeds of sale EXCEPT where an order for possession of the property has been granted by the court • It extends the statutory and common law duties of a receiver appointed under the Act to the mortgagor, mortgagee and any other person for the time being interested in the equity of redemption and provides for the Secretary of State to make regulations to define the scope and nature of the duties and to specify any additional categories of persons to whom the duties are owed • It provides for the Secretary of State by regulations to abolish the right of a mortgagee to obtain peaceable re-entry of a property and to prescribe the maximum penalties that may be imposed on a mortgagee who peaceably re-enters a property • It provides for the Secretary of State by regulations to ensure that a possession order is not made by the court on the application of a mortgagee unless the court is satisfied that the mortgagor has received an adequate opportunity to raise any counterclaim, set-off or other defence that may be available against the mortgagee and the court has determined the merits of any such counterclaim, set-off or other defence (although this shall not prevent the court from making a possession order where the mortgagor has unreasonably delayed pursuing any such counterclaim, set-off or other defence • It provides for the Secretary of State by regulations to make provision to ensure that the court has power on the application of a mortgagor or mortgagee to vary any of the following terms of the mortgage deed or instrument where it appears just to do so – the rate of interest, the schedule of payments, or the value of payments. Regulations must also ensure that an application can be made by the mortgagor or mortgagee to vary an order made pursuant to this provision where there has been a change in circumstances.
Comment	This Bill is likely to have a troubled passage through Parliament. It follows a sequence of largely failed reforms arising out of the decision of Horsham Properties Group Ltd v Clark [2009] 1 WLR 1255 which led to (1) draft amendments to s 36 Administration of Justice Act 1970 in the Banking Bill 2009, (2) The Home Repossession (Protection) Bill - both of which were withdrawn, and (3) the Ministry of Justice Consultation Paper on proposals to ensure that residential owner-occupied mortgaged properties cannot be sold without a court order. Pending such reforms, the Council of Mortgage Lenders published a Voluntary Statement to the effect that “In respect of mortgages secured against owner occupied residential properties CML members will not seek to sell a mortgaged property when the borrower is in default without first obtaining a court order for possession. In addition CML members will not appoint a receiver to sell a residential property without first obtaining a court order for possession”. That said, the Bill would, if enacted in its present form, make some huge changes to the substantive law and established practice and procedure in current mortgage cases, so it is important that practitioners remain abreast of developments.

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