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Undue Influence

WHAT IS IT?

Undue influence in the context of mortgage litigation is an equitable doctrine (a rule or principle of fairness) which may be relied upon as a defence to the enforcement of a mortgage. Similar principles apply in respect of other vitiating circumstances, such as misrepresentation.

It typically arises where a wife is asked to put up her share of the family home as security for her husband’s business borrowings. If the husband resorts to unacceptable force or coercion in order to procure the wife’s entry into the transaction, the court may relieve the wife of liability and set the transaction aside.

The cases draw a distinction between two types of undue influence:
(1) Actual undue influence – which involves the actual use of oppression or domination; and
(2) Presumed undue influence – where the law will presume that a particular transaction between parties standing in a particular relationship is the result of undue influence. There are two categories:
(a) A relationship which is recognised in the law as giving rise to a presumption of undue influence (eg. parent and child, solicitor and client, but not husband
and wife); and
(b) A relationship which on its particular facts gives rise to a presumption of undue influence (where it is shown that one person reposed trust and confidence in
the other).

The categories were identified in BCCI v Aboody [1990] 1 QB 923 at 953 per Slade LJ and were followed by the House of Lords in Barclays Bank plc v O’Brien [1994] 1 AC 180. In Royal Bank of Scotland Plc v Etridge (No.2) [2002] 2 AC 773 the House of Lords preferred to move away from rigid adherence to the distinct categories of undue influence and recognised that undue influence of whatever type was ultimately a matter of proof on the particular facts of each case, and that the presumptions were merely an evidential tool. In practice, they are still referred to and relied upon.

HOW DOES IT WORK?

In a typical husband/wife situation the starting point is always to establish impropriety between husband and wife. Since husband/wife is not a recognised relationship giving rise to a Class 2(a) presumption, this means that the wife has to establish either actual undue influence (Class 1) or a presumption of undue influence on the particular facts (Class 2(b)). The burden of proof is upon her.

IN RELATION TO WHAT KIND OF TRANSACTION?

The transaction has to be such as to put the lender on inquiry that it may have been procured by undue influence. The law distinguishes between two main situations:

(1) Where the lender is put on inquiry: Where the wife is asked to provide security for her husband’s business borrowings (Barclays Bank plc v O’Brien) and

(2) Where the lender is not put on inquiry: eg. Where the wife enters into a joint loan (ostensibly) for their joint benefit (CIBC Mortgages plc v Pitt [1994] 1 AC 200)

If the wife establishes undue influence and that the transaction was such as to put the lender on inquiry the lender will take with constructive notice of the undue influence unless it takes steps to protect itself.

WHAT STEPS SHOULD THE LENDER TAKE TO PROTECT ITSELF?

The steps have been identified in two House of Lords cases (Barclays Bank plc v O’Brien and Royal Bank of Scotland plc v Etridge (No 2) [2002] AC 773), and have been developed and applied in a number of other cases:

The lender should communicate directly with the wife. She should nominate a solicitor to act for her. The lender must provide the wife’s solicitor with the information required to properly advise her – typically information about the purpose of the loan and the amount of the current indebtedness, together with copies of any relevant documents. In addition, it may also be necessary for the husband to make sure he gives full and frank disclosure of all material facts which might influence the wife’s decision (Hewitt v First Plus Financial Group Plc [2010] EWCA Civ 312 – non-disclosure by husband of extra-marital affair amounted to deliberate concealment).

The lender will require a written certificate from the solicitor to the effect that he has explained the nature of the documents; the practical effect they will have; and the risks she runs. This is often referred to as an “Etridge Certificate”, and the lender should not proceed with the transaction until it receives it.

INDEPENDENT LEGAL ADVICE

Although for her own benefit, the wife should nominate an independent solicitor, there is nothing to stop her from nominating her husband’s solicitor. It is then a matter for the solicitor whether he can undertake a professional duty of care to advise her, separately, or whether to declare a conflict of interest. The lender will not be concerned with the content of the legal advice and will usually be entitled to rely upon the certificate (Bank of Scotland v Hill [2002] EWCA Civ 1081), although the position will be otherwise if the lender knows that the solicitor has not properly advised the wife (eg. if it is not confirmed in the borrower’s own language - National Westminster Bank plc v Amin [2002] UKHL 9) or if the solicitor has been engaged in an execution-only role (Lloyds Bank Plc v Holdgate [2002] EWCA Civ 1543).

REMEDIES

The wife’s remedy is to set aside the transaction as against her (which she may be able to do in whole or in part, depending on whether she received any benefit from the transaction), but this does not necessarily mean that the lender will be without a remedy:

(1) The mortgage may still take effect against the husband’s share and enable the lender to apply for an order for sale in order to realise it (First National Bank Plc v Achampong [2003] EWCA Civ 487). In order to do so the court may need to determine the respective shares of the parties, and will not necessarily assume they are held 50/50 (Abbey National Plc v Stringer [2006] EWCA Civ 338).
(2) Alternatively, if the lender’s loan went to pay off a previous joint loan, the lender may be able to stand in the shoes of the earlier lender and rely upon subrogation.

BARS TO RELIEF

Undue influence is an equitable remedy and is subject to the usual bars to relief, including delay and acquiescence. A claimant can be deprived of relief as a result of her subsequent conduct (Habib Bank Ltd v Tufail [2006] EWCA Civ 374 – affirmation amounting to an estoppel).

Significantly though, a mortgage may still be set aside because of inadequate advice even though the wife might have proceeded in any event (UCB Corporate Services Ltd v Williams [2002] EWCA Civ 555 (2003) 1 P & CR 168).

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