Undue Influence
Cases
Allcard v Skinner
(1887) 36 Ch D 145 Lindley LJ
“ What then is the principle? Is it that it is right and expedient to save persons from the consequences of their own folly? or is it that it is right and expedient to save them from being victimised by other people? In my opinion the doctrine of undue influence is founded upon the second of these two principles. Courts of Equity have never set aside gifts on the ground of the folly, imprudence, or want of foresight on the part of donors. The Courts have always repudiated any such jurisdiction. Huguenin v Baseley 14 Ves 273 is itself a clear authority to this effect. It would obviously be to encourage folly, recklessness, extravagance and vice if persons could get back property which they foolishly made away with, whether by giving it to charitable institutions or by bestowing it on less worthy objects. On the other hand, to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud.”
Cotton LJ
“ First where the court has been satisfied that the gift was the result of influence expressly used by the donee for the purpose; second, where the relations between the donor and donee have at or shortly before the execution of the gift been such as to raise a presumption that the donee had influence over the donor. ”
Barclays Bank v O’Brien
[1993] UKHL 6 [1994] AC 180, [1993] 4 All ER 417, [1994] 1 AC 180, [1993] UKHL
Lord Browne Wilkinson
Undue influence
A person who has been induced to enter into a transaction by the undue influence of another (the wrongdoer) is entitled to set that transaction aside as against the wrongdoer. Such undue influence is either actual or presumed. In Bank of Credit and Commerce International SA v Aboody (1988) [1992] 4 All ER 955 at 964, [1990] 1 QB 923 at 953 the Court of Appeal helpfully adopted the following classification.
Class 1: 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 impugned.
Class 2: 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 class 2 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, viz:
Class 2A. 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.
Class 2B. Even if there is no relationship falling within class 2A, 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 class 2B 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 impugned.
As to dispositions by a wife in favour of her husband, the law for long remained in an unsettled state. In the nineteenth century some judges took the view that the relationship was such that it fell into class 2A, ie as a matter of law undue influence by the husband over the wife was presumed. It was not until the decisions in Howes v Bishop [1909] 2 KB 390 and Bank of Montreal v Stuart [1911] AC 120 that it was finally determined that the relationship of husband and wife did not as a matter of law raise a presumption of undue influence within class 2A. It is to be noted therefore that when Turnbull v Duval was decided in 1902 the question whether there was a class 2A presumption of undue influence as between husband and wife was still unresolved.
An invalidating tendency?
Although there is no class 2A presumption of undue influence as between husband and wife, it should be emphasised that in any particular case a wife may well be able to demonstrate that de facto she did leave decisions on financial affairs to her husband thereby bringing herself within class 2B, ie that the relationship between husband and wife in the particular case was such that the wife reposed confidence and trust in her husband in relation to their financial affairs and therefore undue influence is to be presumed. Thus, in those cases which still occur where the wife relies in all financial matters on her husband and simply does what he suggests, a presumption of undue influence within class 2B can be established solely from the proof of such trust and confidence without proof of actual undue influence.
In the appeal in CIBC Mortgages plc v Pitt [1993] 4 All ER 433 (judgment in which is to be given immediately after that in the present appeal) Mr Price QC for the wife argued that in the case of transactions between husband and wife there was an ‘invalidating tendency’, ie although there was no class 2A presumption of undue influence, the courts were more ready to find that a husband had exercised undue influence over his wife than in other cases. Scott LJ in the present case also referred to the law treating married women ‘more tenderly’ than others. This approach is based on dicta in early authorities. In Grigby v Cox (1750) 1 Ves Sen 517, 27 ER 1178 Lord Hardwicke LC, whilst rejecting any presumption of undue influence, said that a court of equity ‘will have more jealousy’ over dispositions by a wife to a husband. In Yerkey v Jones (1939) 63 CLR 649 at 675 Dixon J refers to this ‘invalidating tendency’. He also refers (at 677) to the court recognising ‘the opportunities which a wife’s confidence in her husband gives him of unfairly or improperly procuring her to become surety’.
In my judgment this special tenderness of treatment afforded to wives by the courts is properly attributable to two factors. First, many cases may well fall into the class 2B category of undue influence because the wife demonstrates that she placed trust and confidence in her husband in relation to her financial affairs and therefore raises a presumption of undue influence. Second, the sexual and emotional ties between the parties provide a ready weapon for undue influence: a wife’s true wishes can easily be overborne because of her fear of destroying or damaging the wider relationship between her and her husband if she opposes his wishes.
For myself, I accept that the risk of undue influence affecting a voluntary disposition by a wife in favour of a husband is greater than in the ordinary run of cases where no sexual or emotional ties affect the free exercise of the individual’s will.
Undue influence, misrepresentation and third parties
Up to this point I have been considering the right of a claimant wife to set aside a transaction as against the wrongdoing husband when the transaction has been procured by his undue influence. But in surety cases the decisive question is whether the claimant wife can set aside the transaction, not against the wrongdoing husband, but against the creditor bank. Of course, if the wrongdoing husband is acting as agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor. Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequentially 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 (albeit a purchaser for value) as well as against the husband: see Bainbrigge v Browne (1881) 18 Ch D 188 and BCCI v Aboody [1992] 4 All ER 955 at 980, [1990] 1 QB 923 at 973. Similarly, in cases such as the present where the wife has been induced to enter into the transaction by the husband’s misrepresentation, her equity to set aside the transaction will be enforceable against the creditor if either the husband was acting as the creditor’s agent or the creditor had actual or constructive notice.
Turnbull v Duval
This case provides the foundation of the modern law: the basis on which it was decided is, to say the least, obscure. Mr Duval owed three separate sums to a firm, Turnbull & Co, including £1,000 owed to the Jamaican branch for beer. Turnbulls’ manager and agent in Jamaica was a Mr Campbell. Mr Campbell was also an executor and trustee of a will under which Mrs Duval had a beneficial interest. Mr Campbell threatened to stop supplying beer to Mr Duval unless security was given for the debts owed and, with Mr Campbell’s knowledge, a document was prepared under which Mrs Duval charged her beneficial interest under the will to secure the payment of all debts owed by Mr Duval to Turnbull, ie not only the money owed for beer but all the debts. Mr Duval put pressure on Mrs Duval to sign the document. She was under the impression that the document was to secure the beer debt only. The trial judge and the Court of Appeal in Jamaica held that the security document should be set aside as against Turnbulls on the sole ground that Mr Campbell, as executor of the will, was in a fiduciary capacity vis-à-vis his beneficiary, Mrs Duval, and his employers could not uphold the security document unless they could show that Mrs Duval was fully aware of what she was doing when she entered into it and did it freely. The Privy Council dismissed Turnbulls’ appeal, Lord Lindley expressing the ratio in these terms ([1902] AC 429 at 434-435):
‘In the face of such evidence, their Lordships are of opinion that it is quite impossible to uphold the security given by Mrs. Duval. It is open to the double objection of having been obtained by a trustee from his cestui que trust by pressure through her husband and without independent advice, and of having been obtained by a husband from his wife by pressure and concealment of material facts. Whether the security could be upheld if the only ground for impeaching it was that Mrs. Duval had no independent advice has not really to be determined. Their Lordships are not prepared to say it could not. But there is an additional and even stronger ground for impeaching it. It is, in their Lordships’ opinion, quite clear that Mrs. Duval was pressed by her husband to sign, and did sign, the document, which was very different from what she supposed it to be, and a document of the true nature of which she had no conception. It is impossible to hold that Campbell or Turnbull & Co. are unaffected by such pressure and ignorance. They left everything to Duval, and must abide the consequences.’
The first ground mentioned by Lord Lindley (ie Campbell’s breach of fiduciary duties) raises no problems. It is the second ground which has spawned the whole line of cases with which your Lordships are concerned. It raises two problems. The passage appears to suggest that Mr Duval had acted in some way wrongfully vis-à-vis his wife, and that Turnbulls who ‘had left everything to Duval’ were held liable for Duval’s wrong. What was the wrongful act of Duval vis-à-vis his wife? Second, why did the fact that Turnbulls ‘left everything to Duval’ render them unable to enforce their security?
Turnbull v Duval: was the husband in breach of duty to his wife?
Thanks to the industry of counsel, we have seen the case lodged on the appeal to the Privy Council. The pleadings contain no allegation of undue influence or misrepresentation by Mr Duval. Mrs Duval did not in evidence allege actual or presumptive undue influence. The sole ground of decision in the courts below was Campbell’s fiduciary position. There is no finding of undue influence against Mr Duval. No one appeared for Mrs Duval before the Privy Council. Therefore the second ground of decision sprang wholly from the Board and Lord Lindley’s speech gives little insight into their reasoning.
For myself I can only assume that, if the Board considered that Mr Duval had committed a wrongful act vis-à-vis his wife, it proceeded on a mistaken basis. It will be remembered that in 1902 it had not been finally established that a presumption of undue influence within class 2A did not apply as between husband and wife. The Board may therefore have been proceeding on the basis that the presumption of undue influence applied as between Mr and Mrs Duval. This was certainly one contemporary understanding of the ratio decidendi: see Bishoff’s Trustee v Frank (1903) 89 LT 188. Alternatively, the Board may have been mistakenly applying the heresy propounded by Lord Romilly to the effect that when a person has made a large voluntary disposition the burden is thrown on the party benefiting to show that the disposition was made fairly and honestly and in full understanding of the nature and consequences of the transaction: see Hoghton v Hoghton (1852) 15 Beav 278, 51 ER 545. Although this heresy has never been formally overruled, it has rightly been regarded as bad law for a very long time: see the account given by Dixon J in Yerkey v Jones (1939) 63 CLR 649 at 678 et seq. It is impossible to find a sound basis for holding that Mrs Duval was entitled to set aside the transaction as against her husband. How then could she set it aside as against Turnbulls?
Turnbull v Duval: was the creditor under a direct duty to the wife? It is the lack of any sound basis for holding that Mr Duval was guilty of a legal wrong for which Turnbulls were indirectly held liable which has led to the theory that the creditor, Turnbulls, were themselves in breach of some duty owed by them as creditors directly to the surety, Mrs Duval. No one has ever suggested that in the ordinary case of principal and surety the creditor owes any duty of care to the surety: in the normal case it is for the surety to satisfy himself as to the nature and extent of the obligations he is assuming. Therefore, it is said, there must be some special feature of the case where a wife stands surety for her husband’s debt which gives rise to some special duty. This is the explanation of the decision of Turnbull v Duval given by Dixon J in Yerkey v Jones (1939) 63 CLR 649 at 675, which, in turn, is the basis on which the Court of Appeal in the present case adopted the view that the law imposed on the creditor itself a duty to take steps to ensure not only that the husband had not used undue influence or made a misrepresentation but also that the wife had ‘an adequate understanding of the nature and effect’ of what she was doing. If this interpretation of Turnbull v Duval is correct, the law not only imposes on the creditor a duty vis-à-vis a particular class of surety (where ordinarily there would be none) but the extent of that duty is greater than that which, under the ordinary law, a husband would owe to his wife: a transaction between husband and wife cannot, in the absence of undue influence or misrepresentation, be set aside simply on the ground that the wife did not fully understand the transaction.
Turnbull v Duval: ‘They left everything to Duval and must abide the consequences’ These words provide the only guidance as to the circumstances which led the Board to set aside the surety agreement as against Turnbulls. In later cases the words have often been treated as indicating that Mr Duval (but not Turnbulls themselves) acted in breach of duty to Mrs Duval, that Mr Duval was Turnbulls’ agent and that Turnbulls could not be in a better position than its agent. Quite apart from the difficulty of identifying what was the breach of duty committed by Mr Duval, the concept of Mr Duval having acted as agent for Turnbulls to procure his wife to become surety for the debt was artificial in Turnbull v Duval itself and in some of the later cases becomes even more artificial. As the Court of Appeal in this case point out, in the majority of cases the reality of the relationship is that, the creditor having required of the principal debtor that there must be a surety, the principal debtor on his own account in order to raise the necessary finance seeks to procure the support of the surety. In so doing he is acting for himself not for the creditor.
The subsequent authorities
The authorities in which the principle derived from Turnbull v Duval has been applied are fully analysed in the judgment of Scott LJ and it is unnecessary to review them fully again.
Scott LJ analyses the cases as indicating that down to 1985 there was no decision which indicated that the agency theory, rather than the special equity theory, was the basis of the decision in Turnbull v Duval. I agree. But that is attributable more to the application of the Turnbull v Duval principle than to any analysis of its jurisprudential basis. The only attempts to analyse the basis of the decision in Turnbull v Duval were the Australian decisions in Bank of Victoria Ltd v Mueller (1914) [1925] VLR 642 and the judgment of Dixon J in Yerkey v Jones (1939) 63 CLR 649. The former decision was reached by applying the Romilly heresy which, as I have already said, is bad law. The judgment of Dixon J undoubtedly supports the special equity theory.
From 1985 down to the decision of the Court of Appeal in the present case the decisions have all been based on the agency theory, ie that the principal debtor has acted in breach of duty to his wife, the surety, and that, if the principal debtor was acting as the creditor’s agent but not otherwise, the creditor cannot be in any better position than its agent, the husband. In all the cases since 1985 the principal debtor has procured the agreement of the surety by a legal wrong (undue influence or misrepresentation). In all the cases emphasis was placed on the question whether the creditor was infected by the debtor’s wrongdoing because the debtor was acting as the agent of the creditor in procuring the wife’s agreement to stand as surety. I am unable to agree with Scott LJ that the decision in Kingsnorth Trust Ltd v Bell [1986] 1 All ER 423, [1986] 1 WLR 119 was not based on the agency theory: Dillon LJ expressly makes it a necessary condition that the creditor has entrusted to the husband the task of obtaining his wife’s signature (see [1986] 1 All ER 423 at 427, [1986] 1 WLR 119 at 123).
However, in four of the cases since 1985 attention has been drawn to the fact that, even in the absence of agency, if the debtor has been guilty of undue influence or misrepresentation the creditor may not be able to enforce the surety contract if the creditor had notice, actual or constructive, of the debtor’s conduct: see Avon Finance Co Ltd v Bridger (1979) [1985] 2 All ER 281 at 287 per Brandon LJ, Coldunell Ltd v Gallon [1986] 1 All ER 429 at 439, [1986] QB 1184 at 1199, Midland Bank plc v Shephard [1988] 3 All ER 17 at 23 and BCCI v Aboody [1992] 4 All ER 955 at 980, [1990] 1 QB 923 at 973. As will appear, in my view it is the proper application of the doctrine of notice which provides the key to finding a principled basis for the law.
Accordingly, the present law is built on the unsure foundations of Turnbull v Duval. Like most law founded on obscure and possibly mistaken foundations it has developed in an artificial way, giving rise to artificial distinctions and conflicting decisions. In my judgment your Lordships should seek to restate the law in a form which is principled, reflects the current requirements of society and provides as much certainty as possible.
Conclusions
(a) Wives
My starting point is to clarify the basis of the law. Should wives (and perhaps others) be accorded special rights in relation to surety transactions by the recognition of a special equity applicable only to such persons engaged in such transactions? Or should they enjoy only the same protection as they would enjoy in relation to their other dealings? In my judgment, the special equity theory should be rejected. First, I can find no basis in principle for affording special protection to a limited class in relation to one type of transaction only. Second, to require the creditor to prove knowledge and understanding by the wife in all cases is to reintroduce by the back door either a presumption of undue influence of class 2A (which has been decisively rejected) or the Romilly heresy (which has long been treated as bad law). Third, although Scott LJ found that there were two lines of cases one of which supported the special equity theory, on analysis although many decisions are not inconsistent with that theory the only two cases which support it are Yerkey v Jones and the decision of the Court of Appeal in the present case. Finally, it is not necessary to have recourse to a special equity theory for the proper protection of the legitimate interests of wives as I will seek to show.
In my judgment, if the doctrine of notice is properly applied, there is no need for the introduction of a special equity in these types of cases. A wife who has been induced to stand as a surety for her husband’s debts by his undue influence, misrepresentation or some other legal wrong has an equity as against him to set aside that transaction. Under the ordinary principles of equity, her right to set aside that transaction will be enforceable against third parties (eg against a creditor) if either the husband was acting as the third party’s agent or the third party had actual or constructive notice of the facts giving rise to her equity. Although there may be cases where, without artificiality, it can properly be held that the husband was acting as the agent of the creditor in procuring the wife to stand as surety, such cases will be of very rare occurrence. The key to the problem is to identify the circumstances in which the creditor will be taken to have had notice of the wife’s equity to set aside the transaction.
The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it. Therefore where a wife has agreed to stand surety for her husband’s debts as a result of undue influence or misrepresentation, the creditor will take subject to the wife’s equity to set aside the transaction if the circumstances are such as to put the creditor on inquiry as to the circumstances in which she agreed to stand surety.
It is at this stage that, in my view, the ‘invalidating tendency’ or the law’s ‘tender treatment’ of married women, becomes relevant. As I have said above in dealing with undue influence, this tenderness of the law towards married women is due to the fact that, even today, many wives repose confidence and trust in their husbands in relation to their financial affairs. This tenderness of the law is reflected by the fact that voluntary dispositions by the wife in favour of her husband are more likely to be set aside than other dispositions by her: a wife is more likely to establish presumed undue influence of class 2B by her husband than by others because, in practice, many wives do repose in their husbands trust and confidence in relation to their financial affairs. Moreover the informality of business dealings between spouses raises a substantial risk that the husband has not accurately stated to the wife the nature of the liability she is undertaking, ie he has misrepresented the position, albeit negligently.
Therefore, in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.
It follows that, unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife’s agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife’s rights.
What, then are the reasonable steps which the creditor should take to ensure that it does not have constructive notice of the wife’s rights, if any? Normally the reasonable steps necessary to avoid being fixed with constructive notice consist of making inquiry of the person who may have the earlier right (ie the wife) to see if whether such right is asserted. It is plainly impossible to require of banks and other financial institutions that they should inquire of one spouse whether he or she has been unduly influenced or misled by the other. But in my judgment the creditor, in order to avoid being fixed with constructive notice, 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 advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test. However for the future in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife’s rights. I should make it clear that I have been considering the ordinary case where the creditor knows only that the wife is to stand surety for her husband’s debts. I would not exclude exceptional cases where a creditor has knowledge of further facts which render the presence of undue influence not only possible but probable. In such cases, the creditor to be safe will have to insist that the wife is separately advised.
I am conscious that in treating the creditor as having constructive notice because of the risk of class 2B undue influence or misrepresentation by the husband I may be extending the law as stated by Fry J in Bainbrigge v Browne (1881) 18 Ch D 188 at 197 and the Court of Appeal in BCCI v Aboody [1992] 4 All ER 955 at 980, [1990] 1 QB 923 at 973. Those cases suggest that for a third party to be affected by constructive notice of presumed undue influence the third party must actually know of the circumstances which give rise to a presumption of undue influence. In contrast, my view is that the risk of class 2B undue influence or misrepresentation is sufficient to put the creditor on inquiry. But my statement accords with the principles of notice: if the known facts are such as to indicate the possibility of an adverse claim that is sufficient to put a third party on inquiry. If the law is established as I have suggested, it will hold the balance fairly between on the one hand the vulnerability of the wife who relies implicitly on her husband and, on the other hand, the practical problems of financial institutions asked to accept a secured or unsecured surety obligation from the wife for her husband’s debts. In the context of suretyship, the wife will not have any right to disown her obligations just because subsequently she proves that she did not fully understand the transaction: she will, as in all other areas of her affairs, be bound by her obligations unless her husband has, by misrepresentation, undue influence or other wrong, committed an actionable wrong against her. In the normal case, a financial institution will be able to lend with confidence in reliance on the wife’s surety obligation provided that it warns her (in the absence of the husband) of the amount of her potential liability and of the risk of standing surety and advises her to take independent advice.
Mr Jarvis QC for the bank urged that this is to impose too heavy a burden on financial institutions. I am not impressed by this submission. The report by Professor Jack’s Review Committee on Banking Services: Law and Practice (1989), (Cmnd 622) recommended that prospective guarantors should be adequately warned of the legal effects and possible consequences of their guarantee and of the importance of receiving independent advice. Pursuant to this recommendation, the Code of Banking Practice (adopted by banks and building societies in March 1992) provides in para 12.1 as follows:
‘Banks and building societies will advise private individuals proposing to give them a guarantee or other security for another person’s liabilities that: (i) by giving the guarantee or third party security he or she might become liable instead of or as well as that other person; (ii) he or she should seek independent legal advice before entering into the guarantee or third party security. Guarantees and other third party security forms will contain a clear and prominent notice to the above effect.’
Thus good banking practice (which applies to all guarantees, not only those given by a wife) largely accords with what I consider the law should require when a wife is offered as surety. The only further substantial step required by law beyond that good practice is that the position should be explained by the bank to the wife in a personal interview. I regard this as being essential because a number of the decided cases show that written warnings are often not read and are sometimes intercepted by the husband. It does not seem to me that the requirement of a personal interview imposes such an additional administrative burden as to render the bank’s position unworkable.
(b) Other persons
I have hitherto dealt only with the position where a wife stands surety for her husband’s debts. But in my judgment the same principles are applicable to all other cases where there is an emotional relationship between cohabitees. The ‘tenderness’ shown by the law to married women is not based on the marriage ceremony but reflects the underlying risk of one cohabitee exploiting the emotional involvement and trust of the other. Now that unmarried cohabitation, whether heterosexual or homosexual, is widespread in our society, the law should recognise this. Legal wives are not the only group which are now exposed to the emotional pressure of cohabitation. Therefore if, but only if, the creditor is aware that the surety is cohabiting with the principal debtor, in my judgment the same principles should apply to them as apply to husband and wife.
In addition to the cases of cohabitees, the decision of the Court of Appeal in Avon Finance Co Ltd v Bridger [1985] 2 All ER 281 shows (rightly in my view) that other relationships can give rise to a similar result. In that case a son, by means of misrepresentation, persuaded his elderly parents to stand surety for his debts. The surety obligation was held to be unenforceable by the creditor inter alia because to the bank’s knowledge the parents trusted the son in their financial dealings. In my judgment that case was rightly decided: in a case where the creditor is aware that the surety reposes trust and confidence in the principal debtor in relation to his financial affairs, the creditor is put on inquiry in just the same way as it is in relation to husband and wife.
Summary
I can therefore summarise my views as follows. Where one cohabitee has entered into an obligation to stand as surety for the debts of the other cohabitee and the creditor is aware that they are cohabitees: (1) the surety obligation will be valid and enforceable by the creditor unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor; (2) if there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the creditor has taken reasonable steps to satisfy himself that the surety entered into the obligation freely and in knowledge of the true facts, the creditor will be unable to enforce the surety obligation because he will be fixed with constructive notice of the surety’s right to set aside the transaction; (3) unless there are special exceptional circumstances, a creditor will have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warns the surety (at a meeting not attended by the principal debtor) of the amount of her potential liability and of the risks involved and advises the surety to take independent legal advice.
I should make it clear that in referring to the husband’s debts I include the debts of a company in which the husband (but not the wife) has a direct financial interest.
CIBC Mortgages plc v Pitt
[1993] UKHL 7 [1994] 1 AC 200, [1994] AC 200, [1993] 4 All ER 433, [
Lord Browne Wilkinson
Applying the decision of this House in O ‘Brien,Mrs. Pitt h
as established actual undue influence by Mr. Pitt.
The plaintiff will not however be affected by such undue influence unless Mr. Pitt was, in
a real sense, acting as agent of the plaintiff in procuring Mrs. Pitt’s agreement
or the plaintiff had actual or constructive notice of the undue influence. The
judge has correctly held that Mr. Pitt was not acting as agent for the plaintiff.
The plaintiff had no actual notice of the undue influence. What, then, was
known to the plaintiff that could put it on inquiry so as to fix it with
constructive notice?
So far as the plaintiff was aware, the transaction consisted of a joint
loan to husband and wife to finance the discharge of an existing mortgage on
26 Alexander Avenue, and as to the balance to be applied in buying a holiday
home. The loan was advanced to both husband and wife jointly. There was
nothing to indicate to the plaintiff that this was anything other than a normal
advance to husband and wife for their joint benefit.
Mr. Price, for Mrs. Pitt, argued that the invalidating tendency which
reflects the risk of there being Class 2(B) undue influence was, in itself,
sufficient to put the plaintiff on inquiry. I reject this submission without
hesitation. It accords neither with justice nor with practical common sense.
If third parties were to be fixed with constructive notice of undue influence in
relation to every transaction between husband and wife, such transactions
would become almost impossible. On every purchase of a home in the joint
names, the building society or bank financing the purchase would have to
insist on meeting the wife separately from her husband, advise her as to the
nature of the transaction and recommend her to take legal advice separate
from that of her husband. If that were not done, the financial institution
would have to run the risk of a subsequent attempt by the wife to avoid her
liabilities under the mortgage on the grounds of undue influence or
misrepresentation. To establish the law in that sense would not benefit the
average married couple and would discourage financial institutions from
making the advance.
What distinguishes the case of the joint advance from the surety case
is that, in the latter, there is not only the possibility of undue influence having
been exercised but also the increased risk of it having in fact been exercised
because, at least on its face, the guarantee by a wife of her husband’s debts
is not for her financial benefit. It is the combination of these two factors that
puts the creditor on inquiry.
Royal Bank of Scotland plc v Etridge (No 2)
[2001] UKHL 44
Lord Clyde
“123. Turning to the individual appeals, the cases fall into 3 different categories. There are three cases – Harris, Wallace and Moore – which have not got beyond the interlocutory stage, the wives’ pleadings having been struck out as disclosing no defence to the banks’ claims for possession. There are four cases – Etridge, Gill, Coleman and Bennett – which have proceeded to trial and in which, at trial and/or on appeal, the wife has been unsuccessful. Finally there is a single case – Kenyon-Brown – in which the wife was suing her solicitor for damages for breach of duty. Your Lordships are in favour of allowing the appeals in Kenyon-Brown, Harris, Wallace, Moore and Bennett: I agree. I also agree that the appeals in Etridge, Gill and Coleman should be dismissed. There is an important distinction to be drawn between cases which have been tried where the parties have been able to test the opposing case and the trial judge was able to make findings of fact having seen the critical witnesses and evaluated the evidence. By contrast, in those cases where the lender is applying for an immediate possession order without a trial or to have the defence struck out, the court is being asked to hold that, even if the wife’s allegations of fact be accepted, the wife’s case is hopeless and bound to fail and that there is no reason why the case should go to trial. This conclusion is not to be arrived at lightly nor should such an order be made simply on the basis that the lender is more likely to succeed. Once it is accepted that the wife has raised an arguable case that she was in fact the victim of undue influence and that the bank had been put on enquiry, it will have to be a very clear case before one can say that the bank should not have to justify its conduct at a trial.
Kenyon-Brown: 124. I take this case first because it falls into a different category to the others. The wife was claiming damages against a firm of solicitors on the basis that, under the undue influence of her husband, she had entered into an adverse suretyship transaction for the benefit of her husband, which also involved charging a cottage which they jointly owned, and that the solicitors had failed to give her appropriate advice to prevent this happening. The guarantee was unlimited. The wife was unable to give specific or reliable evidence in support of her case against the solicitors but relied upon the fact that the transaction was manifestly disadvantageous to her and upon the duty of the solicitor, as stated by the Court of Appeal in Etridge No2 [1998] 4 All ER 705 at para 19, to satisfy himself that she was free from improper influence. The certificate which the solicitor gave to the lender was that he had given her legal advice. In Kenyon-Brown, the majority of the Court of Appeal, in disagreement with the trial judge, considered that this led inexorably to the conclusion that the solicitor must have been negligent. I agree with your Lordships that the conclusion of the Court of Appeal was not justified upon the evidence adduced at the trial. The burden of proof was upon the wife to establish that the solicitor had been negligent. She could not say that she had not been given comprehensive advice which included a full warning of the consequences of her entering into the transaction. She could not contradict that he had told her specifically that the mortgage would only benefit her husband and was without limit. He was her solicitor and advised her as his client. The judge was right: she failed to make out her case against the solicitor on the facts. If she had been able to give reliable evidence and be clearer about what she said had happened and had been in a position to challenge the solicitor’s attendance note, she might have succeeded. The solicitor’s duty towards her was as stated by my noble and learned friend Lord Nicholls. It seems that it was substantially observed and in so far as the solicitor might be criticised, no causative relevance was established.
Wallace: 125. This was an interlocutory case. The bank claimed the possession of a flat in Priory Road, Hampstead, which was jointly owned by Mr and Mrs Wallace. The bank claimed possession on the basis of an all monies legal charge signed by the husband and the wife against which the bank had advanced money to the husband. It was accepted that she had an arguable case that she had been unduly influenced to sign by her husband. The bank did not at any stage communicate with the wife or anyone acting for her. It sent the charge to its own solicitor with instructions to attend to the necessary formalities in the signing of the charge. The husband and wife went together to the bank’s solicitor’s office. The wife’s case was that she was there 3 or 4 minutes at most; she signed as directed by the solicitor; there was no other discussion; her impression was that the solicitor had been instructed by the bank merely to take and witness her signature. On this case the bank had no basis for rebutting the risk that her signature had not been properly obtained. It had no basis for any belief that she had been separately advised by a solicitor who was acting for her. The only solicitor of which the bank knew was a solicitor acting for itself alone which had in a side letter to the bank, of which the wife knew nothing, told the bank no more than that the documents had been explained. The wife clearly had an arguable case for defending the possession action. The reasoning of the Court of Appeal in arriving at the contrary conclusion was that the bank was (or, perhaps, would have been) entitled to assume that the solicitor had been acting as the wife’s solicitor and had discharged his duty to her as her solicitor. As stated, this assumption would have been without foundation. I agree that this appeal should be allowed.
Harris: 126. This was also an interlocutory case. The judge struck out her defence and counterclaim as disclosing no arguable defence to the bank’s action for the possession of the house owned jointly by the husband and wife where they lived. The husband had, through the medium of two companies, two businesses one of which had effectively failed leaving him with a heavy personal liability. He consulted solicitors, Wragge & Co, to find a way of carrying on his other business. They advised him to negotiate a new facility with the bank with new security. The outcome was an offer from the bank of new finance for the second company secured by unlimited guarantees from both the husband and wife and a legal charge on their house. The bank was clearly put on enquiry. It was accepted that for striking out purposes the wife had an arguable case on undue influence. The relevant question was therefore whether the bank took reasonable steps to satisfy itself that the wife’s agreement had not been improperly obtained. Wragge & Co were only known to the bank as the husband’s solicitors. The bank took no steps to communicate with the wife who was allowed to remain in ignorance of what precisely was the position between her husband and the bank. The wife was never told that she would be required to be separately advised nor that she should instruct a solicitor to certify to the bank that she had been so advised. In her pleading the wife had pleaded that the solicitors were acting for the bank, her husband and herself. However before the judge the affidavit sworn by her solicitor in the action (Mr Holt of Evans Derry Binnion) in response to the bank’s striking out application deposed (para 6) –
“It is important to note that insofar as my client is concerned Wragge & Co were not her solicitors. Wragge & Co were solicitors who had been instructed by Mr Harris personally previously and he had a personal connection with one of the partners at that [firm].”
126. The wife therefore has an arguable case that Wragge & Co were never her solicitors and that the case is in this respect the same as the Wallace case. There is however a further feature of this case. The bank wrote to Wragge & Co, knowing them only as the husband’s solicitors, asking them, among other things, “to explain the nature of the document to both parties and confirm to us that independent legal advice has been given”. The letter in reply from Wragge & Co did not give the bank that confirmation, a fact which the bank did not pick up until about nine months later. The bank then wrote to Wragge & Co pointing this out and asking for confirmation that independent legal advice had nevertheless been given. On receiving this further letter, the partner at Wragge & Co commented: “I do not think that independent legal advice was given.” On this, it would appear that the bank appreciated that it needed confirmation that the wife had been independently advised. Patently it did not get it. The bank realised that it had not got it and that she may well never have been independently advised. This was clearly a case where the judge should have allowed the case to go to trial. The wife had an arguable defence on more than one ground. The Court of Appeal dismissed the wife’s appeal giving only brief reasons – “The solicitors were acting for Mrs Harris and the bank were entitled to assume that they had given appropriate advice and were entitled to accept the solicitors’ letter as confirmation that this had been done.” These reasons fly in the face of the evidence and cannot be supported. This appeal should be allowed.
Moore: 127. This is the third of the interlocutory cases. It is less clear cut than the other two. But it is not a case in which it should be said, in my judgment, that no trial is justified and that, on the basis of her pleaded case, the wife is bound to fail in her defence of the possession action. It is accepted for present purposes that she has an arguable case of undue influence and misrepresentation by her husband. Her case is that she had in fact instructed no solicitors to act for her and received no advice whatsoever. The charge was unlimited in amount. The loan transaction was not wholly straightforward in that, whilst it included the refinancing of indebtedness which was already secured on the matrimonial home in Pangbourne, it was as to 3/5ths composed of a substantial additional advance to the company run by the husband which was already in financial trouble (and was to fail within two years). In this connection, the company and the husband used an independent insurance broker, Mr Zerfahs and his brother (a credit broker), as a go-between with the lender. The lender had no direct communication with the wife, nor did Mr Zerfahs communicate with her. Were it not for one fact, this would be a case which fell into the same category as Wallace. The potential saving fact for the lender was that the husband had started his deception by persuading his wife to sign the mortgage application form in blank. One of the boxes in the form was “solicitor’s details”. The husband, who was the primary applicant, filled this in with the name of the solicitors who had been instructed by Mr Zerfahs without informing the wife or obtaining her authority: “Quiney & Harris (Nigel Whittaker)” and their address in Wootton Bassett near Swindon. As a result, on the face of the form sent to the lender there was a single solicitor who was to act on behalf of both applicants. The wife says that the husband had not obtained her authority to fill in the form in this way; it is agreed that the husband undoubtedly filled in other parts of the form fraudulently. Having received instructions from Mr Zerfahs, the solicitors, without obtaining confirmation from the wife, referred to her and her husband in correspondence as “our clients”. The lender did not obtain any assurance that the wife had received independent advice before signing. It is the wife’s case that she received no advice at all. This is a disturbing case. It may turn out (if there is a trial) that the wife is an unreliable witness and that her case cannot be accepted. But, for present purposes, the lender’s case has to depend wholly upon an estoppel arising from her having signed the application form in blank and, it is argued, an inference that she had been separately advised as an independent client by the solicitor. I do not believe that this is a sound basis for disposing of this case without a trial. The true facts need to be known. She was the victim of misrepresentation; the solicitors purported to act on her behalf without any authority to do so; the only document which the lender saw did not suggest anything other than a joint retainer; the lender never checked the position with the wife or sought any confirmation that she was being separately advised. Discovery of documents and a morning in the County Court would have sorted the matter out more expeditiously and cheaply. I agree that this appeal should be allowed.
Royal Bank of Scotland v Etridge: 128. This is a case which, after some delay and contested interlocutory proceedings, went to a trial before Judge Behrens. The wife gave evidence. The judge found that, on the evidence, she had not been the victim of any actual undue influence. However he went on to deal with the case on the basis of presumed undue influence. On appeal, the Court of Appeal upheld the Judge’s finding of no actual undue influence; nor did she at either level obtain a finding in her favour that she had been induced to sign by any misrepresentation. Accordingly, on the correct view of the law, her case failed in limine and none of the other points arose. Judgment was rightly entered for the bank. On this ground, I agree that this appeal should be dismissed. This case provides an object lesson in the dangers of attempting a summary resolution of issues of mixed law and fact without having ascertained the facts.
Gill: 129. This too is a case which went to trial. The evidence discloses what might have been a case of misrepresentation which possibly could have led to the wife succeeding. The transaction was presented in a fashion which may have led the wife and the solicitors mistakenly to believe that only an advance of £36,000 was involved, not a probable £100,000. However, be that as it may, the case advanced by the wife at the trial was that she had been the victim of actual undue influence. This case was rejected by the Judge and, in any event, there was evidence that the extended scope of the transaction is something which she would in fact have supported and was not causative. Therefore this case is, in the critical respect, similar to the Etridge case. She failed to prove the allegation necessary to found her case. I agree that this appeal should be dismissed.
Coleman: 130. In this case there was a trial which was not confined to a simple claim by the bank against the wife; it involved also her husband (who in addition counterclaimed against the bank) and third parties joined by the wife. With some reluctance I agree that the wife’s appeal should be dismissed. This is not because of any inherent lack of merit in her case; she has been appallingly badly served. It is because to set aside the judgments entered against her below would be contrary to the grounds upon which her case was conducted at the trial and in the Court of Appeal. The wife and her husband were members of the Hasidic Jewish community. This factually involved a relationship of complete trust and confidence between the wife and her husband in relation to financial matters. I agree with Lord Scott that it is a case where, having drawn the appropriate inferences, actual undue influence was in fact established. The wife was being asked to charge her home to secure advances to her husband for the purpose of enabling him to engage in property speculation, he being unable to offer the bank adequate other security. It was also a case where the bank was clearly put on enquiry. The relevant point which should have been considered was therefore whether the bank took steps of the kind referred to by Lord Nicholls (para 79) (or in the National Westminster document) in order to protect itself from being affected by any such undue influence. But at the trial the dealings between the bank and the wife and the solicitor were not covered by documentary evidence and seem not to have been the subject of direct oral evidence either. The wife simply said that she went to the solicitor’s office at the request of her husband and that all the managing clerk, whom they saw there, did before witnessing her signature was to ask her in the presence of her husband if he, her husband, had explained the documents to her. Her account (which the judge accepted) gives a pertinent reminder of the gap between theory and reality and illustrates the type of charade which, as Sir Peter Millett has observed (sup), lenders well know may occur and should not be tolerated or sanctioned by equity. However, at the trial, the wife’s case was that the elderly solicitor for whom the managing clerk worked was acting as her solicitor. She joined what she thought were the appropriate persons as third parties suing them for breach of professional duty. The elderly solicitor had died. The trial judge dismissed her claim against the third parties holding that she had sued the wrong persons. There was a further unusual feature of the case. The bank had asked for a certificate in the unusual terms: “I confirm that this document was signed in my presence and that the full effect of its contents have been explained to and were understood by Miriam Mara Coleman, and she has signed this document of her own free will.” (emphasis supplied.) It was this certificate that the managing clerk signed. If the bank were entitled to believe that this certificate was supplied by the wife’s own solicitor instructed by her, the bank might have had a basis for believing that the wife’s consent had been properly obtained. I venture to doubt whether any reasonable banker would have put this construction upon the available evidence but in view of the course of the proceedings before the trial judge and the basis upon which the wife’s case was then put it would not be permissible now to allow this appeal upon an inconsistent and untested basis. The greater part of the time at the trial seems to have been taken up with the dispute between the husband and the bank. As between the wife and the bank, the judgments in the courts below were primarily concerned with aspects of the problem of presumed undue influence which do not now arise and with the question of the adequacy of a certificate signed by a legal executive as opposed to a solicitor which must depend on the facts of each case.
Bennett: 131. I agree that this appeal should be allowed. The existence of the ranking agreement was important and qualified the transaction as it was disclosed to the surety. I do not wish to add anything to what is to be said about this point by Lord Scott. This suffices for the allowing of the appeal. It is accordingly unnecessary to say anything about the undue influence issues.”
Lord Nicholls
The complainant and third parties: suretyship transactions
The problem considered in O’Brien’s case and raised by the present appeals is of comparatively recent origin. It arises out of the substantial growth in home ownership over the last 30 or 40 years and, as part of that development, the great increase in the number of homes owned jointly by husbands and wives. More than two-thirds of householders in the United Kingdom now own their own homes. For most home-owning couples, their homes are their most valuable asset. They must surely be free, if they so wish, to use this asset as a means of raising money, whether for the purpose of the husband’s business or for any other purpose. Their home is their property. The law should not restrict them in the use they may make of it. Bank finance is in fact by far the most important source of external capital for small businesses with fewer than ten employees. These businesses comprise about 95 percent of all businesses in the country, responsible for nearly one-third of all employment. Finance raised by second mortgages on the principal’s home is a significant source of capital for the start-up of small businesses.
If the freedom of home-owners to make economic use of their homes is not to be frustrated, a bank must be able to have confidence that a wife’s signature of the necessary guarantee and charge will be as binding upon her as is the signature of anyone else on documents which he or she may sign. Otherwise banks will not be willing to lend money on the security of a jointly owned house or flat.
At the same time, the high degree of trust and confidence and emotional interdependence which normally characterises a marriage relationship provides scope for abuse. One party may take advantage of the other’s vulnerability. Unhappily, such abuse does occur. Further, it is all too easy for a husband, anxious or even desperate for bank finance, to misstate the position in some particular or to mislead the wife, wittingly or unwittingly, in some other way. The law would be seriously defective if it did not recognise these realities.
In O’Brien’s case this House decided where the balance should be held between these competing interests. On the one side, there is the need to protect a wife against a husband’s undue influence. On the other side, there is the need for the bank to be able to have reasonable confidence in the strength of its security. Otherwise it would not provide the required money. The problem lies in finding the course best designed to protect wives in a minority of cases without unreasonably hampering the giving and taking of security. The House produced a practical solution. The House decided what are the steps a bank should take to ensure it is not affected by any claim the wife may have that her signature of the documents was procured by the undue influence or other wrong of her husband. Like every compromise, the outcome falls short of achieving in full the objectives of either of the two competing interests. In particular, the steps required of banks will not guarantee that, in future, wives will not be subjected to undue influence or misled when standing as sureties. Short of prohibiting this type of suretyship transaction altogether, there is no way of achieving that result, desirable although it is. What passes between a husband and wife in this regard in the privacy of their own home is not capable of regulation or investigation as a prelude to the wife entering into a suretyship transaction.
The jurisprudential route by which the House reached its conclusion in O’Brien’s case has attracted criticism from some commentators. It has been said to involve artificiality and thereby create uncertainty in the law. I must first consider this criticism. In the ordinary course a bank which takes a guarantee security from the wife of its customer will be altogether ignorant of any undue influence the customer may have exercised in order to secure the wife’s concurrence. In O’Brien Lord Browne-Wilkinson prayed in aid the doctrine of constructive notice. In circumstances he identified, a creditor is put on inquiry. When that is so, the creditor ‘will have constructive notice of the wife’s rights’ unless the creditor takes reasonable steps to satisfy himself that the wife’s agreement to stand surety has been properly obtained: see [1994] 1 AC 180, 196.
Lord Browne-Wilkinson would be the first to recognise this is not a conventional use of the equitable concept of constructive notice. The traditional use of this concept concerns the circumstances in which a transferee of property who acquires a legal estate from a transferor with a defective title may nonetheless obtain a good title, that is, a better title than the transferor had. That is not the present case. The bank acquires its charge from the wife, and there is nothing wrong with her title to her share of the matrimonial home. The transferor wife is seeking to resile from the very transaction she entered into with the bank, on the ground that her apparent consent was procured by the undue influence or other misconduct, such as misrepresentation, of a third party (her husband). She is seeking to set aside her contract of guarantee and, with it, the charge she gave to the bank.
The traditional view of equity in this tripartite situation seems to be that a person in the position of the wife will only be relieved of her bargain if the other party to the transaction (the bank, in the present instance) was privy to the conduct which led to the wife’s entry into the transaction. Knowledge is required: see Cobbett v Brock (1855) 20 Beav 524, 528, 531, per Sir John Romilly MR, Kempson v Ashbee (1874) LR 10 Ch App 15, 21, per James LJ, and Bainbrigge v Browne, 18 Ch D 188, 197, per Fry J. The law imposes no obligation on one party to a transaction to check whether the other party’s concurrence was obtained by undue influence. But O’Brien has introduced into the law the concept that, in certain circumstances, a party to a contract may lose the benefit of his contract, entered into in good faith, if he ought to have known that the other’s concurrence had been procured by the misconduct of a third party.
There is a further respect in which O’Brien departed from conventional concepts. Traditionally, a person is deemed to have notice (that is, he has ‘constructive’ notice) of a prior right when he does not actually know of it but would have learned of it had he made the requisite inquiries. A purchaser will be treated as having constructive notice of all that a reasonably prudent purchaser would have discovered. In the present type of case, the steps a bank is required to take, lest it have constructive notice that the wife’s concurrence was procured improperly by her husband, do not consist of making inquiries. Rather, O’Brien envisages that the steps taken by the bank will reduce, or even eliminate, the risk of the wife entering into the transaction under any misapprehension or as a result of undue influence by her husband. The steps are not concerned to discover whether the wife has been wronged by her husband in this way. The steps are concerned to minimise the risk that such a wrong may be committed.
These novelties do not point to the conclusion that the decision of this House in O’Brien is leading the law astray. Lord Browne-Wilkinson acknowledged he might be extending the law: see [1994] 1 AC 180, 197. Some development was sorely needed. The law had to find a way of giving wives a reasonable measure of protection, without adding unreasonably to the expense involved in entering into guarantee transactions of the type under consideration. The protection had to extend also to any misrepresentations made by a husband to his wife. In a situation where there is a substantial risk the husband may exercise his influence improperly regarding the provision of security for his business debts, there is an increased risk that explanations of the transaction given by him to his wife may be misleadingly incomplete or even inaccurate.
The route selected in O’Brien ought not to have an unsettling effect on established principles of contract. O’Brien concerned suretyship transactions. These are tripartite transactions. They involve the debtor as well as the creditor and the guarantor. The guarantor enters into the transaction at the request of the debtor. The guarantor assumes obligations. On the face of the transaction the guarantor usually receives no benefit in return, unless the guarantee is being given on a commercial basis. Leaving aside cases where the relationship between the surety and the debtor is commercial, a guarantee transaction is one-sided so far as the guarantor is concerned. The creditor knows this. Thus the decision in O’Brien is directed at a class of contracts which has special features of its own. That said, I must at a later stage in this speech return to the question of the wider implications of the O’Brien decision.
The threshold: when the bank is put on inquiry
In O’Brien the House considered the circumstances in which a bank, or other creditor, is ‘put on inquiry.’ Strictly this is a misnomer. As already noted, a bank is not required to make inquiries. But it will be convenient to use the terminology which has now become accepted in this context. The House set a low level for the threshold which must be crossed before a bank is put on inquiry. For practical reasons the level is set much lower than is required to satisfy a court that, failing contrary evidence, the court may infer that the transaction was procured by undue influence. Lord Browne-Wilkinson said ([1994] 1 AC 180, 196):
‘Therefore in my judgment a creditor in put on inquiry when a wife offers to stand surety for her husband’s debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.’
In my view, this passage, read in context, is to be taken to mean, quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband’s debts.
The Court of Appeal, comprising Stuart-Smith, Millett and Morritt LJJ, interpreted this passage more restrictively. The threshold, the court said, is somewhat higher. Where condition (a) is satisfied, the bank is put on inquiry if, but only if, the bank is aware that the parties are cohabiting or that the particular surety places implicit trust and confidence in the principal debtor in relation to her financial affairs: see Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705, 719.
I respectfully disagree. I do not read (a) and (b) as factual conditions which must be proved in each case before a bank is put on inquiry. I do not understand Lord Browne-Wilkinson to have been saying that, in husband and wife cases, whether the bank is put on inquiry depends on its state of knowledge of the parties’ marriage, or of the degree of trust and confidence the particular wife places in her husband in relation to her financial affairs. That would leave banks in a state of considerable uncertainty in a situation where it is important they should know clearly where they stand. The test should be simple and clear and easy to apply in a wide range of circumstances. I read (a) and (b) as Lord Browne-Wilkinson’s broad explanation of the reason why a creditor is put on inquiry when a wife offers to stand surety for her husband’s debts. These are the two factors which, taken together, constitute the underlying rationale.
The position is likewise if the husband stands surety for his wife’s debts. Similarly, in the case of unmarried couples, whether heterosexual or homosexual, where the bank is aware of the relationship: see Lord Browne-Wilkinson in O’Brien’s case, at p 198. Cohabitation is not essential. The Court of Appeal rightly so decided in Massey v Midland Bank Plc [1995] 1 All ER 929: see Steyn LJ, at p 933.
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. That was decided in CIBC Mortgages Plc v Pitt [1994] 1 AC 200
Less clear cut is the case where the wife becomes surety for the debts of a company whose shares are held by her and her husband. Her shareholding may be nominal, or she may have a minority shareholding or an equal shareholding with her husband. In my view the bank is put on inquiry in such cases, even when the wife is a director or secretary of the company. Such cases cannot be equated with joint loans. The shareholding interests, and the identity of the directors, are not a reliable guide to the identity of the persons who actually have the conduct of the company’s business.
The steps a bank should take
The principal area of controversy on these appeals concerns the steps a bank should take when it has been put on inquiry. In O’Brien Lord Browne-Wilkinson, at [1994] 1 AC 180, 196-197, 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 advice. That test is applicable to past transactions. All the cases now before your Lordships’ House fall into this category. For the future a bank satisfies these requirements if it insists that the wife attend a private meeting with a representative of the bank at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. In exceptional cases the bank, to be safe, has to insist that the wife is separately advised.
The practice of the banks involved in the present cases, and it seems reasonable to assume this is the practice of banks generally, is not to have a private meeting with the wife. Nor do the banks themselves take any other steps to bring home to the wife the risk she is running. This has continued to be the practice since the decision in O’Brien’s case. Banks consider they would stand to lose more than they would gain by holding a private meeting with the wife. They are, apparently, unwilling to assume the responsibility of advising the wife at such a meeting. Instead, the banking practice remains, as before, that in general the bank requires a wife to seek legal advice. The bank seeks written confirmation from a solicitor that he has explained the nature and effect of the documents to the wife.
Many of the difficulties which have arisen in the present cases stem from serious deficiencies, or alleged deficiencies, in the quality of the legal advice given to the wives. I say ‘alleged’, because three of the appeals before your Lordships’ House have not proceeded beyond the interlocutory stage. The banks successfully applied for summary judgment. In these cases the wife’s allegations, made in affidavit form, have not been tested by cross-examination. On behalf of the wives it has been submitted that under the current practice the legal advice is often perfunctory in the extreme and, further, that everyone, including the banks, knows this. Independent legal advice is a fiction. The system is a charade. In practice it provides little or no protection for a wife who is under a misapprehension about the risks involved or who is being coerced into signing. She may not even know the present state of her husband’s indebtedness.
My Lords, it is plainly neither desirable nor practicable that banks should be required to attempt to discover for themselves whether a wife’s consent is being procured by the exercise of undue influence of her husband. This is not a step the banks should be expected to take. Nor, further, is it desirable or practicable that banks should be expected to insist on confirmation from a solicitor that the solicitor has satisfied himself that the wife’s consent has not been procured by undue influence. As already noted, the circumstances in which banks are put on inquiry are extremely wide. They embrace every case where a wife is entering into a suretyship transaction in respect of her husband’s debts. Many, if not most, wives would be understandably outraged by having to respond to the sort of questioning which would be appropriate before a responsible solicitor could give such a confirmation. In any event, solicitors are not equipped to carry out such an exercise in any really worthwhile way, and they will usually lack the necessary materials. Moreover, the legal costs involved, which would inevitably fall on the husband who is seeking financial assistance from the bank, would be substantial. To require such an intrusive, inconclusive and expensive exercise in every case would be an altogether disproportionate response to the need to protect those cases, presumably a small minority, where a wife is being wronged.
The furthest a bank can be expected to go is to take reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction. This does not wholly eliminate the risk of undue influence or misrepresentation. But it does mean that a wife enters into a transaction with her eyes open so far as the basic elements of the transaction are concerned.
This is the point at which, in the O’Brien case, the House decided that the balance between the competing interests should be held. A bank may itself provide the necessary information directly to the wife. Indeed, it is best equipped to do so. But banks are not following that course. Ought they to be obliged to do so in every case? I do not think Lord Browne-Wilkinson so stated in O’Brien. I do not understand him to have said that a personal meeting was the only way a bank could discharge its obligation to bring home to the wife the risks she is running. It seems to me that, provided a suitable alternative is available, banks ought not to be compelled to take this course. Their reasons for not wishing to hold a personal meeting are understandable. Commonly, when a bank seeks to enforce a security provided by a customer, it is met with a defence based on assurances alleged to have been given orally by a branch manager at an earlier stage: that the bank would continue to support the business, that the bank would not call in its loan, and so forth. Lengthy litigation ensues. Sometimes the allegations prove to be well founded, sometimes not. Banks are concerned to avoid the prospect of similar litigation which would arise in guarantee cases if they were to adopt a practice of holding a meeting with a wife at which the bank’s representative would explain the proposed guarantee transaction. It is not unreasonable for the banks to prefer that this task should be undertaken by an independent legal adviser.
I shall return later to the steps a bank should take when it follows this course. Suffice to say, these steps, together with advice from a solicitor acting for the wife, ought to provide the substance of the protection which O’Brien intended a wife should have. Ordinarily it will be reasonable that a bank should be able to rely upon confirmation from a solicitor, acting for the wife, that he has advised the wife appropriately.
The position will be otherwise if the bank knows that the solicitor has not duly advised the wife or, I would add, if the bank knows facts from which it ought to have realised that the wife has not received the appropriate advice. In such circumstances the bank will proceed at its own risk.
The content of the legal advice
In Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705, 715, para 19, the Court of Appeal set out its views of the duties of a solicitor in this context:
‘A solicitor who is instructed to advise a person who may be subject to the undue influence of another must bear in mind that it is not sufficient that she understands the nature and effect of the transaction if she is so affected by the influence of the other that she cannot make an independent decision of her own. It is not sufficient to explain the documentation and ensure she understands the nature of the transaction and wishes to carry it out: see Powell v Powell [1900] 1 Ch 243, 247, approved in Wright v Carter [1903] 1 Ch 27. His duty is to satisfy himself that his client is free from improper influence, and the first step must be to ascertain whether it is one into which she could sensibly be advised to enter if free from such influence. If he is not so satisfied, it is his duty to advise her not to enter into it, and to refuse to act further for her in the implementation of the transaction if she persists. In this event, while the contents of his advice must remain confidential, he should inform the other parties (including the bank) that he has seen his client and given her certain advice, and that as a result he has declined to act for her any further. He must in any event advise her that she is under no obligation to enter into the transaction at all and, if she still wishes to do so, that she is not bound to accept the terms of any document which has been put before her: see Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144.’
I am unable to accept this as an accurate formulation of a solicitor’s duties in cases such as those now under consideration. In some respects it goes much too far. The observations of Farwell J in Powell v Powell [1900] 1 Ch 243, 247, should not be pressed unduly widely. Powell v Powell was a case where strong moral pressure was applied by a stepmother to a girl who was only just twenty one. She was regarded as not really capable of dealing irrevocably with her parent or guardian in the matter of a substantial settlement. Farwell J’s observations cannot be regarded as of general application in all cases where a solicitor is giving advice to a person who may have been subject to undue influence.
More pertinently, in In re Coomber, Coomber v Coomber [1911] 1 Ch 723, 730, Fletcher Moulton LJ summarised the general rules applicable to cases of persons who are competent to form an opinion of their own:
‘All that is necessary is that some independent person, free from any taint of the relationship, or of the consideration of interest which would affect the act, should put clearly before the person what are the nature and the consequences of the act. It is for adult persons of competent mind to decide whether they will do an act, and I do not think that independent and competent advice means independent and competent approval. It simply means that the advice shall be removed entirely from the suspected atmosphere; and that from the clear language of an independent mind, they should know precisely what they are doing.’
Thus, in the present type of case it is not for the solicitor to veto the transaction by declining to confirm to the bank that he has explained the documents to the wife and the risks she is taking upon herself. If the solicitor considers the transaction is not in the wife’s best interests, he will give reasoned advice to the wife to that effect. But at the end of the day the decision on whether to proceed is the decision of the client, not the solicitor. A wife is not to be precluded from entering into a financially unwise transaction if, for her own reasons, she wishes to do so.
That is the general rule. There may, of course, be exceptional circumstances where it is glaringly obvious that the wife is being grievously wronged. In such a case the solicitor should decline to act further. In Wright v Carter [1903] 1 Ch 27, 57-58, Stirling LJ approved Farwell J’s observations in Powell v Powell [1900] 1 Ch 243, 247. But he did so by reference to the extreme example of a poor man divesting himself of all his property in favour of his solicitor.
In Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705, 722, para 49, the Court of Appeal said that if the transaction is ‘one into which no competent solicitor could properly advise the wife to enter’, the availability of legal advice is insufficient to avoid the bank being fixed with constructive notice. It follows from the views expressed above that I am unable to agree with the Court of Appeal on this point.
I turn to consider the scope of the responsibilities of a solicitor who is advising the wife. In identifying what are the solicitor’s responsibilities the starting point must always be the solicitor’s retainer. What has he been retained to do? As a general proposition, the scope of a solicitor’s duties is dictated by the terms, whether express or implied, of his retainer. In the type of case now under consideration the relevant retainer stems from the bank’s concern to receive confirmation from the solicitor that, in short, the solicitor has brought home to the wife the risks involved in the proposed transaction. As a first step the solicitor will need to explain to the wife the purpose for which he has become involved at all. He should explain that, should it ever become necessary, the bank will rely upon his involvement to counter any suggestion that the wife was overborne by her husband or that she did not properly understand the implications of the transaction. The solicitor will need to obtain confirmation from the wife that she wishes him to act for her in the matter and to advise her on the legal and practical implications of the proposed transaction.
When an instruction to this effect is forthcoming, the content of the advice required from a solicitor before giving the confirmation sought by the bank will, inevitably, depend upon the circumstances of the case. Typically, the advice a solicitor can be expected to give should cover the following matters as the core minimum. (1) He will need to explain the nature of the documents and the practical consequences these will have for the wife if she signs them. She could lose her home if her husband’s business does not prosper. Her home may be her only substantial asset, as well as the family’s home. She could be made bankrupt. (2) He will need to point out the seriousness of the risks involved. The wife should be told the purpose of the proposed new facility, the amount and principal terms of the new facility, and that the bank might increase the amount of the facility, or change its terms, or grant a new facility, without reference to her. She should be told the amount of her liability under her guarantee. The solicitor should discuss the wife’s financial means, including her understanding of the value of the property being charged. The solicitor should discuss whether the wife or her husband has any other assets out of which repayment could be made if the husband’s business should fail. These matters are relevant to the seriousness of the risks involved. (3) The solicitor will need to state clearly that the wife has a choice. The decision is hers and hers alone. Explanation of the choice facing the wife will call for some discussion of the present financial position, including the amount of the husband’s present indebtedness, and the amount of his current overdraft facility. (4) The solicitor should check whether the wife wishes to proceed. She should be asked whether she is content that the solicitor should write to the bank confirming he has explained to her the nature of the documents and the practical implications they may have for her, or whether, for instance, she would prefer him to negotiate with the bank on the terms of the transaction. Matters for negotiation could include the sequence in which the various securities will be called upon or a specific or lower limit to her liabilities. The solicitor should not give any confirmation to the bank without the wife’s authority.
The solicitor’s discussion with the wife should take place at a face-to-face meeting, in the absence of the husband. It goes without saying that the solicitor’s explanations should be couched in suitably non-technical language. It also goes without saying that the solicitor’s task is an important one. It is not a formality.
The solicitor should obtain from the bank any information he needs. If the bank fails for any reason to provide information requested by the solicitor, the solicitor should decline to provide the confirmation sought by the bank.
As already noted, the advice which a solicitor can be expected to give must depend on the particular facts of the case. But I have set out this ‘core minimum’ in some detail, because the quality of the legal advice is the most disturbing feature of some of the present appeals. The perfunctory nature of the advice may well be largely due to a failure by some solicitors to understand what is required in these cases.
Independent advice
I turn next to the much-vexed question whether the solicitor advising the wife must act for the wife alone. Or, at the very least, the solicitor must not act for the husband or the bank in the current transaction save in a wholly ministerial capacity, such as carrying out conveyancing formalities or supervising the execution of documents and witnessing signatures. Commonly, in practice, the solicitor advising the wife will be the solicitor acting also for her husband either in the particular transaction or generally.
The first point to note is that this question cannot be answered by reference to reported decisions. The steps a bank must take once it is put on inquiry, if it is to avoid having constructive notice of the wife’s rights, are not the subject of exposition in earlier authority. This is a novel situation, created by the O’Brien decision.
Next, a simple and clear rule is needed, preferably of well nigh universal application. In some cases a bank deals directly with a husband and wife and has to take the initiative in requiring the wife to obtain legal advice. In other cases, a bank may deal throughout with solicitors already acting for the husband and wife. The case of Bank of Baroda v Rayarel [1995] 2 FLR 376 is an example of the latter type of case. It would not be satisfactory to attempt to draw a distinction along these lines. Any such distinction would lack a principled base. Inevitably, in practice, the distinction would disintegrate in confusion.
Thirdly, here again, a balancing exercise is called for. Some features point in one direction, others in the opposite direction. Factors favouring the need for the solicitor to act for the wife alone include the following. Sometimes a wife may be inhibited in discussion with a solicitor who is also acting for the husband or whose main client is the husband. This occurred in Banco Exterior Internacional v Mann [1995] 1 All ER 936: see the finding of the judge, at p 941F-G. Sometimes a solicitor whose main client is the husband may not, in practice, give the same single-minded attention to the wife’s position as would a solicitor acting solely for the wife. Her interests may rank lower in the solicitor’s scale of priorities, perhaps unconsciously, than the interests of the husband. Instances of incompetent advice, or worse, which have come before the court might perhaps be less likely to recur if a solicitor were instructed to act for the wife alone and gave advice solely to her. As a matter of general understanding, independent advice would suggest that the solicitor should not be acting in the same transaction for the person who, if there is any undue influence, is the source of that influence.
The contrary view is that the solicitor may also act for the husband or the bank, provided the solicitor is satisfied that this is in the wife’s best interests and satisfied also that this will not give rise to any conflicts of duty or interest. The principal factors favouring this approach are as follows. A requirement that a wife should receive advice from a solicitor acting solely for her will frequently add significantly to the legal costs. Sometimes a wife will be happier to be advised by a family solicitor known to her than by a complete stranger. Sometimes a solicitor who knows both husband and wife and their histories will be better placed to advise than a solicitor who is a complete stranger.
In my view, overall the latter factors are more weighty than the former. The advantages attendant upon the employment of a solicitor acting solely for the wife do not justify the additional expense this would involve for the husband. When accepting instructions to advise the wife the solicitor assumes responsibilities directly to her, both at law and professionally. These duties, and this is central to the reasoning on this point, are owed to the wife alone. In advising the wife the solicitor is acting for the wife alone. He is concerned only with her interests. I emphasise, therefore, that in every case the solicitor must consider carefully whether there is any conflict of duty or interest and, more widely, whether it would be in the best interests of the wife for him to accept instructions from her. If he decides to accept instructions, his assumption of legal and professional responsibilities to her ought, in the ordinary course of things, to provide sufficient assurance that he will give the requisite advice fully, carefully and conscientiously. Especially so, now that the nature of the advice called for has been clarified. If at any stage the solicitor becomes concerned that there is a real risk that other interests or duties may inhibit his advice to the wife he must cease to act for her.
Thompson v Foy
[2009] EWHC 1076 [2010] 1 P & CR 16, [2009] 22 EG 119Undue influence
The law
I turn next to undue influence. The law relating to undue influence is comprehensively discussed by the House of Lords in Royal Bank of Scotland plc v. Etridge (No. 2) [2002] 2 AC 773. The following principles are relevant to the present case:
i) The objective of the doctrine of undue influence is to ensure that the influence of one person (“the donee”) over another (“the donor”) is not abused (§ 6);
ii) If the donor intends to enter into a transaction, but the intention was produced by means which lead to the conclusion that the intention thus procured ought not fairly to be treated as the expression of the donor’s free will, the law will not permit the transaction to stand (§ 7);
iii) Broadly, there are two forms of unacceptable conduct. The first comprises overt acts of improper pressure or coercion such as unlawful threats. The second form arises out of a relationship between two persons where one has acquired over another a measure of influence, or ascendancy, of which the ascendant person then takes unfair advantage. (§ 8);
iv) The principle is not confined to abuse of trust or confidence. It also extends to the exploitation of the vulnerable (§ 11);
v) Disadvantage to the donor is not a necessary ingredient of undue influence (§ 12). However, it may have an evidential value, because it is relevant to the questions whether any allegation of abuse of confidence can properly be made, and whether any abuse actually occurred (§ 104);
vi) Whether a transaction has been brought about by undue influence is a question of fact (§ 13);
vii) The legal burden of proving undue influence rests on the person alleging it. The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case (§ 13);
viii) If the claimant proves (a) that the donor placed trust and confidence in the donee or that the donee acquired ascendancy over the donor, and (b) that the transaction calls out for explanation, the claimant has discharged an evidential burden, which will also enable an inference of undue influence to be drawn, and thus satisfy the legal burden, unless the donee produces evidence to counter the inference which would otherwise be drawn (§§ 14, 21 and 156);
ix) This is simply a question of evidence and proof. At the end of the day, after trial, there will either be proof of undue influence or that proof will fail and it will be found that there is no undue influence. In the former case, whatever the relationship between the parties and however the influence was exerted, there will have been found to have been an actual case of undue influence. In the latter there will be none (§ 93).
x) Proof that the donor received advice from a third party before entering into the impugned transaction is one of the matters a court takes into account when weighing all the evidence. The weight, or importance, to be attached to such advice depends on all the circumstances. In the normal course, advice from a solicitor or other outside adviser can be expected to bring home to a donor a proper understanding of what he or she is about to do. But a person may understand fully the implications of a proposed transaction, for instance, a substantial gift, and yet still be acting under the undue influence of another. Proof of outside advice does not, of itself, necessarily show that the subsequent completion of the transaction was free from the exercise of undue influence. Whether it will be proper to infer that outside advice had an emancipating effect, so that the transaction was not brought about by the exercise of undue influence, is a question of fact to be decided having regard to all the evidence in the case (§ 20);
xi) The nature of the advice required is that someone free from the taint of undue influence should put before the donor the nature and consequences of the proposed transaction. It is not necessary for the adviser to recommend the transaction. An adult of competent mind is entitled to enter into a financially unwise transaction if he or she wants to (§§ 60 and 61).
In the light of the arguments before me, there are some additional observations I should make. First, although in Etridge Lord Nicholls of Birkenhead described the paradigm case of a relationship where influence is presumed as being one in which the complainant reposed trust and confidence in the other party in relation to the management of the complainant’s financial affairs (§ 14), I do not consider that this description was intended to be exhaustive. To restrict the type of trust and confidence in this way would not be consistent with the authoritative exposition by Lindley LJ in Allcard v Skinner (1887) 36 Ch D 145 in which Lindley LJ referred to “cases in which the position of the donor to the donee has been such that it has been the duty of the donee to advise the donor, or even to manage his property for him”. This very sentence was paraphrased by Lord Nicholls (§ 9). In addition, when describing the circumstances in which the burden of proof would shift (§ 21) Lord Nicholls used much more general language. Second, the requisite trust and confidence can arise in the course of the impugned transaction itself: Turkey v Awadh [2005] 2 P. & C.R. 29 (§ 11). Third, although the cases (and the textbooks) speak of “presumed undue influence” and “actual undue influence” these are no more than different ways of proving the same thing. In the former case undue influence is proved with the aid of an evidential presumption. In the latter case it must be proved without any such presumption. Fourth, if a relationship of the requisite character is proved, the burden of proof does not shift unless the transaction itself is one that calls for an explanation and is not satisfactorily explained. As Buxton LJ said in Turkey v Awadh (§ 15):
“If on the evidence the transaction cannot so be explained — that is to say, the transaction calls for an explanation and that explanation is not forthcoming—the burden then shifts to the claimant to show that in fact, and despite the terms and nature of the agreement, he did not in truth abuse the position that he held. He would normally discharge that burden—as, for instance, now at least occurs in husband and wife cases—by showing that the defendant entered into the matter with his will fully unconstrained, usually with the benefit of independent legal advice.” (Emphasis added)
Fifth, in order to determine whether a transaction is explicable in terms other than undue influence, it is necessary to look at it in its context and to see what its general nature was and what it was trying to achieve for the parties: Turkey v Awadh (§ 32). Sixth, the critical question is whether or not the influence has invaded the free volition of the donor to withstand the influence. The donor may be led but she must not be driven; and her will must be the offspring of her own volition, not a record of someone else’s. There is no undue influence unless the donor if she were free and informed could say “This is not my wish but I must do it”: Drew v Daniel [2005] 2 FCR 365 (§ 36). Seventh, it is highly unlikely on the facts that the court would ever be justified in finding that undue influence consisted both of coercion and abuse of trust and confidence. People do not usually trust those who coerce them: Bank of Scotland v Bennett [1999] FLR 1115, 1135 (to which Lord Scott of Foscote referred in Etridge § 314). Lord Hoffmann made much the same point in R v HM Attorney General [2003] UKPC 22 (§ 24). Eighth, what I must look at is whether Mrs Thompson was caused to enter into the transaction by undue influence; and this necessarily means looking at the situation at the time the impugned transaction was entered into, rather than at subsequent events, save in so far as subsequent events cast light on what was happening before and at the time of the impugned transaction. A transaction into which someone enters of their own free will does not retrospectively become tainted by undue influence merely because the counter-party fails to perform his or her side of the bargain.
Daniel v Drew
[2005] EWCA Civ 507
Ward LJ
The judge’s directions as to the law.
He said that the relevant law was not in dispute and was contained in Lord Nicholls of Birkenhead’s speech in Royal Bank of Scotland v Etridge (No. 2) [2002] 2 AC 773 and he quoted from paragraphs 6 to 12 inclusive. In this part of his speech Lord Nicholls had found it “necessary to go back to first principles”. He explained in paragraph 6 that:-
“Undue influence is one of the grounds of relief developed by the Courts of Equity as a court of conscience. The objective is to ensure that the influence of one party over another is not abused.”
In paragraph 7 he explained how equity supplemented the common law which dealt narrowly with duress:-
“Equity extended the reach of the law to other unacceptable forms of persuasion. The law will investigate the manner in which the intention to enter into the transaction was secured; “how the intention was produced”; in the oft repeated words of Lord Eldon as long ago as 1807 (Huguenin v Baseley 14 Ves 273, 300). If the intention was produced by an unacceptable means the law will not permit the transaction to stand. The means used is regarded as an exercise of improper or “undue” influence and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person’s free will. It is impossible to be more precise or definite. The circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion.”
In paragraph 8 he drew the distinction between “overt acts of improper pressure or coercion such as unlawful threats” and the second form now commonly referred to as presumed undue influence which:-
“arises out of the relationship between two persons where one has acquired over another a measure of influence, or ascendancy, of which the ascendant person then takes unfair advantage.”
As he explained in paragraph 9:-
“Typically this occurs when one person places trust in another to look after his affairs and interests, and the latter betrays this trust by preferring his own interests.”
In paragraph 11 he pointed out that:-
“The principle is not confined to cases of abuse of trust and confidence. It also includes, for instance, cases where a vulnerable person has been exploited. Indeed there is no single touchstone for determining whether the principle is applicable. Several expressions have been used in an endeavour to encapsulate the essence: trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other. None of these descriptions is perfect. None is all-embracing. Each has its proper place.”
Judge Weeks, a very experienced judge, said this:-
“The reference to “exploitation of the vulnerable” in paragraph 11 was made in the context of what used to be called “presumed undue influence”. Although this is a case, if anything, of express undue influence, I think the reference is relevant because the exploitation of the vulnerable can be regarded as an example of unacceptable conduct where the consent procured ought not fairly to be treated as an expression of a person’s free will.”
The judge’s conclusion.
Having asked whether Margaret’s intention had been procured by unacceptable means he decided:-
“Mrs Drew was, in my judgment, a vulnerable person, unversed in business, anxious to avoid confrontation and eager to comply. Nicholas Daniel was younger and according to his aunt did not show her the respect she thought he should. I have heard him give evidence. He has a keen appreciation of his own interests and scant regard for those of others. “Unscrupulous” would be too harsh a description but he is, at the very least, insensitive. Again, in my view, “aggressive” would probably be too harsh and “forceful” might be a better description of his character.
He knew that if his aunt was given the chance to talk to her son or her solicitors the transaction would not proceed as he wished. He deliberately chose not to involve them, but to take advantage of his aunt’s naiveté in business matters. In my judgment the means by which her signature was procured is unacceptable. Mrs Drew’s consent, obtained in the circumstances that I have described ought not fairly to be treated as an expression of her free will.”
The appellant’s case.
In summary, Mr Batstone advances this case on behalf of the appellant, though only the first two submissions were set out in the grounds of appeal in the appellant’s notice.
i) It was necessary for the claimant, Aunt Margaret, to establish that her signatures had been procured by overt acts of improper pressure or coercion and the judge neither found that nor was there evidence to support any such finding.
ii) The judge was wrong to take account of her vulnerability: in doing so he elided actual and presumed undue influence.
iii) Lord Eldon’s often quoted words, “The question is, not, whether she knew, what she was doing, had done, or proposed to do, but how the intention was produced”, are applicable only in cases of presumed undue influence and so the judge erred in applying them here.
iv) To observe that the court would have to resolve the dispute cannot amount to unlawful or improper pressure.
v) The judge erred in the fact-finding exercise in that (i) he failed to weigh the medical evidence properly (ii) he failed to take into account the contemporaneous note written by the claimant (iii) he was wrong to find that Aunt Margaret was a vulnerable lady (iv) he failed to deal at all with the evidence of Nicholas and Mr Joint that he would leave the deed with her to decide at leisure whether or not to sign it (vi) accordingly, the judge made too great an invasion into the sanctity of understandings reached between individuals simply because one had been persuaded by the other.
Actual undue influence.
It is true that Lord Nicholls defined actual undue influence in terms of “overt acts of improper pressure or coercion such as unlawful threats”. He drew the distinction between cases of presumed undue influence and those where there was evidence of “specific overt acts of persuasion” or “overt acts of persuasive conduct”. Judge Weeks directed himself in accordance with that speech and for my part I cannot accept that he did not have those matters in mind. It is, of course, only one way of describing the first class of undue influence because, as Lindley L.J. observed in Allcard v Skinner (1887) 36 Ch.D 145, 183:-
“As no Court has ever attempted to define fraud so no Court has ever attempted to define undue influence, which includes one of its many varieties.”
His description at page 181 of the first category was this:-
“There are the cases in which there has been some unfair and improper conduct, some coercion from outside, some over-reaching, some form of cheating, and generally, though not always, some personal advantage obtained by a donee placed in some close and confidential relation to the donor.”
In the broadest possible way, the difference between the two classes is that in the case of actual undue influence something has to be done to twist the mind of a donor whereas in cases of presumed undue influence it is more a case of what has not been done namely ensuring that independent advice is available to the donor. I will return to the question of whether or not this is established in this case.
Mr Batstone is also correct in his submission that when Lord Nicholls included cases “where a vulnerable person has been exploited”, he was still dealing with presumed undue influence. Where I disagree with Mr Batstone is in his submission that the judge fell into the error of eliding the two classes of cases. He did not. He was clear that the reference to “exploitation of the vulnerable” was made in the context of presumed undue influence and that this case was “if anything, [one] of express undue influence”. He did not elide the two classes. He was, however, justified in treating the exploitation as a relevant factor because it “can be regarded as an example of unacceptable conduct where the consent procured ought not fairly to be treated as the expression of a person’s free will”. There is in any given case a vast penumbra of facts which bear upon the question whether actual undue influence was exerted. The vulnerability of one party must feature in that analysis. So does the forcefulness of the personality of the other. I can see no error in the judge’s approach.
I cannot accept Mr Batstone’s submission that Lord Eldon’s words apply only in the case of presumed undue influence. He draws support for that submission from this passage in Lindley L.J.’s judgment at page 181-182 which I cite at length:-
“The second group consists of cases in which the position of the donor to the donee has been such that it has been the duty of the donee to advise the donor, or even to manage his property for him. In such cases the Court throws upon the donee the burden of proving that he has not abused his position, and of proving that the gift made to him has not been brought about by any undue influence on his part. In this class of cases it has been considered necessary to show that the donor had independent advice, and was removed from the influence of the donee when the gift to him was made. Huguenin v Baseley was a case of this kind. The defendant had not only acquired considerable spiritual influence over the plaintiff, but was entrusted by her with the management of her property. His duty to her was clear, and it was with reference to persons so situated that Lord Eldon used the language so often quoted and so much relied on in this case. He said: “Take it that she (the plaintiff) intended to give it to him (the defendant): it is by no means out of the reach of the principle. The question is, not, whether she knew, what she was doing, had done, or proposed to do, but how the intention was produced: whether all that care and providence was placed round her, as against those, who advised her, which, from their situation in relation with respect to her, they were bound to exert on her behalf.” This principle has been constantly recognised and acted upon in the subsequent cases, but in all of them, as in Huguenin v Baseley itself, it was the duty of the donee to advise and take care of the donor. Where there is no such duty the language of Lord Eldon ceases to be applicable.”
I venture to think Mr Batstone has misunderstood the last sentence. What Lindley L.J. was saying is that if there is no duty of the kind which fixes the case in class two, then there is no need to question why the donor acted as she did. The court does not enter upon that enquiry unless the relationship of ascendancy, which is how Lord Nicholls described it, has first been established. Without that evidence a case of presumed undue influence simply would not get off the ground.
Nothing in Lindley L.J.’s judgment suggests that Lord Eldon’s dictum should be as narrowly confined as Mr Batstone submits. If there is no presumed undue influence then there is no need to inquire what prompted the relevant decision taken by the donor but if actual influence is under consideration the enquiry seems equally apposite. Lindley L.J. went on in his judgment on page 182 to examine the principle which underlies both classes of undue influence and he set it out in these terms:-
“Is it that it is right and expedient to save persons from the consequence of their own folly? or is it that it is right and expedient to save them from being victimised by other people? In my opinion the doctrine of undue influence is founded upon the second of these two principles. Courts of Equity have never set aside gifts on the ground of the folly, imprudence, or want of foresight on the part of donors. The Courts have always repudiated any such jurisdiction. Huguenin v Baseley is itself a clear authority to this effect. It would obviously be to encourage folly, recklessness, extravagance and vice if persons could get back property which they foolishly made away with, whether by giving it to charitable institutions or by bestowing it on less worthy objects. On the other hand to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud.
As no Court has ever attempted to define fraud, so no Court has ever attempted to define undue influence, which includes one of its many varieties. The undue influence which Courts of Equity endeavour to defeat is the undue influence of one person over another; not the influence of enthusiasm on the enthusiast who is carried away by it, unless indeed such enthusiasm is itself the result of external undue influence. But the influence of one mind over another is very subtle …”
This passage, which I repeat applies to both forms of undue influence, demonstrates to me that in all cases of undue influence the critical question is whether or not the persuasion or the advice, in other words the influence, has invaded the free volition of the donor to accept or reject the persuasion or advice or withstand the influence. The donor may be led but she must not be driven and her will must be the offspring of her own volition, not a record of someone else’s. There is no undue influence unless the donor if she were free and informed could say “This is not my wish but I must do it”.
Any doubt that Lord Eldon’s words apply to both classes of undue influence is removed by paragraph 7 of Lord Nicholls’ speech which I have set out in paragraph 24 above where, when dealing with undue influence in general he expresses the view that the law will investigate the manner in which the intention to enter into the transaction was secured. Mr Batstone was forced to concede that Lord Nicholls was dealing with both forms of undue influence and that seems to me to be the end of his argument on this ground. The judge was perfectly entitled to pose the question he had to answer in terms culled from Lord Nicholls’ speech: “How was that intention procured and was it procured by unacceptable means?”
Winifred Carroll and Mary Jane Carroll v. Michelle Carroll
[2000] 1 I.L.R.M. 210
Supreme Court
Denham J
Undue influence — decision
There are two classes of transactions which may be set aside on the grounds of undue influence. They were described by Cotton LJ in Allcard v. Skinner (1887) 36 ChD 145 at p. 171 as:
The question is — Does the case fall within the principles laid down by the decisions of the Court of Chancery in setting aside voluntary gifts executed by parties who at the time were under such influence as, in the opinion of the court, enabled the donor afterwards to set the gift aside? These decisions may be divided into two classes — First, where the court has been satisfied that the gift was the result of influence expressly used by the donee for the purpose; second, where the relations between the donor and donee have at or shortly before the execution of the gift been such as to raise a presumption that the donee had influence over the donor. In such a case the court sets aside the voluntary gift, unless it is proved that in fact the gift was the spontaneous act of the donor acting under circumstances which enabled him to exercise an independent will and which justifies the court in holding that the gift was the result of a free exercise of the donor’s will …. In the second class of cases the court interferes, not on the ground that any wrongful act has in fact been committed by the donee, but on the ground of public policy, and to prevent the relations which existed between the parties and the influence arising therefrom being abused.
This case arises under the second class of case. Counsel for the appellant quite rightly accepted that this case falls into the latter category. He acknowledged that the relationship between Thomas Carroll Senior and Thomas Carroll Junior and the surrounding circumstances gave rise to the presumption of undue influence.
The legal situation arising on such relationship being established was described in Equity and the Law of Trusts in Ireland by Hilary Delany at p.482 as:
Once a relationship giving rise to a presumption of undue influence is established, and it is shown that a ‘substantial benefit’ has been obtained, the onus lies on the donee to establish that the gift or transaction resulted from the ‘free exercise of the donor’s will’ . As Dixon J put it in Johnson v. Butress (1936) 56 CLR 113 , 134–35, the evidence must establish that the gift was ‘the independent and well-understood act of a man in a position to exercise a free judgment based on information as full as that of the donee’ . The manner in which this presumption may be rebutted relates to two main issues; first the question of whether independent legal advice has been received and secondly, whether it can be shown that the decision to make the gift or transfer was ‘a spontaneous and independent act’ or that the donor ‘acted of his own free will’ .
I adopt this analysis of the law and apply it. In this case the presumption is established and a substantial benefit was obtained; thus the onus lies on the donee, the appellant, to establish that the transfer was the free exercise of the will of the donor, Thomas Carroll Senior. Thus, it was for the appellant to provide the evidence that the transfer was the independent and free gift of Thomas Carroll Senior. The issue then arising is whether there was evidence upon which the learned trial judge could be satisfied that the presumption was not rebutted. In analysing this the first matter is that of independent legal advice. Although it was submitted that Mr Joyce was the family solicitor on the evidence he appears to have been predominantly that of Thomas Carroll Junior. The legal advice relied upon was given by Mr Joyce. Mr Joyce was engaged and paid by Thomas Carroll Junior. It was Thomas Carroll Junior’s name which was on the file. In his evidence Mr Joyce referred to ‘his instructions’ . He appeared to misconceive his duty. Further, Mr Joyce did not know that the asset being transferred was practically the sole asset of Thomas Carroll Senior and so could not advise him fully or explain the consequences of his action. Nor did he know of the family, the relationships with the daughters, and so could not advise on this matter either. In light of the absence of this information he could not advise Thomas Carroll Senior appropriately.
In considering whether Thomas Carroll Senior acted of his own free will an important matter was whether or not the transfer was read over to Thomas Carroll Senior. There was no evidence of this even though the appellant was given an opportunity in the High Court to address the matter.
This case is not about the presence or absence of mental capacity. The onus is on the appellant to produce evidence to dislodge the presumption of undue influence.
The learned trial judge concluded, on this aspect of the case, at pp. 230– 231, that:
I am not satisfied that the [appellant] has established as a matter of probability that the transaction was the result of the free exercise of the donor’s will such as to rebut the presumption of undue influence. Mr Joyce allowed that in substance and fact he was acting as the ‘family solicitor’ in the transaction for both parties. He saw the donor on two occasions for a total of about 35–40 minutes, not all of which was devoted to the business of the transfer. It is clear the donor never read the transfer deed nor had it read to him by anyone else. While its contents were apparently discussed between him and Mr Joyce, I am not satisfied that any real consideration was given to the fact that the donor (a frail man, in dependent circumstances) was disposing of all his real assets without reserving to himself (by way of a revocation clause or by way of charging the property with his maintenance and support), any protection for his own future particularly in the event of a falling out with his son, or in the event of his son predeceasing him. It is, I think, clear that Philip Joyce was not aware of the family’s circumstances either in the context of the position of the other members of the family, the totality of the assets held by the family members or the assurances given by the donor to other members of the family including the plaintiffs as to their user of the Burke Street premises during their lifetimes. Thus, while I accept the evidence (which was not really disputed) that the donor was a man who was mentally alert at the date of the transfer, I am not at all happy that at the date of the transfer he had the necessary independent advice (whether it was that of a legal advisor or a competent and qualified lay person) such as would persuade me that the transaction was made of his own free will.
There was evidence before the learned trial judge upon which he could reach these conclusions of fact. Thus, I would affirm his determination.
Mr Dwyer submitted that for the respondents to succeed there should be evidence that Thomas Carroll Junior exercised undue influence on Thomas Carroll Senior. This submission was at the core of the appeal. Counsel argued strongly that as Thomas Carroll Junior himself had not unduly influenced his father that was sufficient to rebut the presumption. He argued that in this case Thomas Carroll Junior did not exercise undue influence, or in Mr Dwyer’s word, ‘wiles’ on Thomas Carroll Senior. That being the case, it being accepted that Thomas Carroll Senior was mentally capable, it was submitted that he could give away his assets as he wished. Mr Dwyer relied on the lack of undue influence exercised by Thomas Carroll Junior and referred to R. (Proctor) v. Hutton [1978] NI 139 .
However, this is not a case of actual undue influence being expressly exercised but is rather a case in which the relationship between the donor and donee has raised the presumption of undue influence. It is then for the appellant to rebut the presumption. The burden was described in Inche Noriah v. Shaik Allie Bin Omar [1929] AC 127 at pp. 135–136 by Lord Hailsham LC:
It is necessary for the donee to prove that the gift was the result of the free exercise of independent will. The most obvious way to prove this is by establishing that the gift was made after the nature and effect of the transaction had been fully explained to the donor by some independent and qualified person so completely as to satisfy the court that the donor was acting independently of any influence from the donee and with the full appreciation of what he was doing; and in cases where there are no other circumstances this may be the only means by which the donee can rebut the presumption. But the fact to be established is that stated in the judgment already cited of Cotton LJ [in Allcard v. Skinner [1887] 36 Ch D 145] and if evidence is given of circumstances sufficient to establish this fact, their Lordships see no reason for disregarding them merely because they do not include independent advice from a lawyer. Nor are their Lordships prepared to lay down what advice must be received in order to satisfy the rule in cases where independent legal advice is relied upon, further than to say that it must be given with a knowledge of all relevant circumstances and must be such as a competent and honest adviser would give if acting solely in the interests of the donor.
In R. (Proctor) v. Hutton [1978] NI 139 at p. 146 Lord Lowry described the different approaches to the different classes of undue influence. He stated:
When relying on ‘express undue influence’ the plaintiff must prove that an unfair advantage has been gained by an unconscientious use of power in the form of some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating. The undue influence which is presumed in the second class of case is influence of the same kind: the difference lies in not being able to prove its exercise but, by virtue of the presumption, undue influence is deemed to have been exercised until its exercise is negatived on a balance of probabilities by evidence.
It is clear that what is at issue is whether the donee has taken advantage of his position or
… been assiduous not to do so. The question can only be answered in each case by a meticulous consideration of the facts: Hanbury, Modern Equity (9th ed.), p.652.
I am satisfied that this is the correct approach. In this case, the presumption existing, it was then necessary to conduct a careful analysis of the facts. On the facts it was a matter of determining if the donee, Thomas Carroll Junior, had taken advantage of his position or had been assiduous not to do so. This was not a case where the issue was whether Thomas Carroll Junior had taken advantage of his position expressly. Rather it was a case where in the circumstances assiduous care should have been taken not to take advantage of the position of Thomas Carroll Senior.
The learned trial judge conducted a painstaking analysis of the facts as has been set out fully in this judgment. I am satisfied that the appeal was argued on a mistaken approach to the law. The reason for the equitable law to protect Thomas Carroll Senior is one of public policy — to protect a frail person. As Cotton LJ said in Allcard v. Skinner at p. 171:
In the second class of cases the court interferes, not on the ground that any wrongful act has in fact been committed by the donee, but on the ground of public policy, and to prevent the relations which existed between the parties and the influence arising therefrom being abused.
Thus, the issue is whether on the facts and circumstances of the case the donee has rebutted the presumption of undue influence. The facts and circumstances of this case were fully considered and determined by the learned High Court Judge. In this case the donor was giving away practically his sole asset and the learned trial judge made careful findings of fact about the transaction.
The conclusions reached in Inche Noriah are analogous on the law and facts to those found by the learned trial judge. In that case Lord Hailsham, describing amongst other matters the conduct of the lawyer Mr James Aitken, stated at p. 136:
In the present case their Lordships do not doubt that Mr Aitken acted in good faith; but he seems to have received a good deal of his information from the respondent; he was not made aware of the material fact that the property which was being given away constituted practically the whole estate of the donor, and he certainly does not seem to have brought home to her mind the consequences to herself of what she was doing, or the fact that she could more prudently, and equally effectively, have benefited the donee without undue risk to herself by retaining the property in her own possession during her life and bestowing it upon him by her will. In their Lordships’ view the facts proved by the respondent are not sufficient to rebut the presumption of undue influence which is raised by the relationship proved to have been in existence between the parties; and they regard it as most important from the point of view of public policy to maintain the rule of law which has been laid down and to insist that a gift made under circumstances which give rise to the presumption must be set aside unless the donee is able to satisfy the court of facts sufficient to rebut the presumption.
The learned trial judge reached a similar conclusion on the law in this case. I am satisfied that he was correct, it was not necessary to prove specific acts of undue influence by Thomas Carroll Junior. The evidence as a whole must be considered to see whether the presumption of undue influence has been rebutted. This was done most carefully by the learned trial judge. I would affirm his decision on this aspect of the appeal.
Improvidence of the transaction — decision
Thomas Carroll Senior was disposing of practically his only asset. At the time he was frail. He did not retain any right of maintenance or support. I have already analysed the nature of the legal advice he received and affirmed the decision that it was inadequate. In all the circumstances, as described above, it is clear that Thomas Carroll Senior was an unequal party. In Grealish v. Murphy [1946] IR 35 at pp. 49–50 Gavan-Duffy J stated:
The issue thus raised brings into play Lord Hatherley’s cardinal principle (from which the exceptions are rare) that equity comes to the rescue whenever the parties to a contract have not met upon equal terms, see Lord Hatherley’s judgment (dissenting on facts) in O’Rorke v. Bolingbroke 2 App Cas 814 ; the corollary is that the court must inquire whether a grantor, shown to be unequal to protecting himself, has had the protection which was his due by reason of his infirmity, and the infirmity may take various forms. The deed here was in law a transaction for value: Colreavy v. Colreavy [1940] IR 71 ; however tenuous the value may have proved to be in fact, and, of course, a court must be very much slower to undo a transaction for value; but the fundamental principle to justify radical interference by the court is the identical principle, whether value be shown or not, and the recorded examples run from gifts and voluntary settlements (including an abortive marriage settlement) to assignments for a money consideration. The principle has been applied to improvident grants, whether the particular disadvantage entailing the need for protection to the grantor were merely low station and surprise (though the grantor’s rights were fully explained). Evans v. Llewellin 1 Cox Eq Cas 333 ; or youth and inexperience: Prideaux v. Lonsdale 1 De GJ & S 433 ; Everitt v. Everitt 10 Eq 405 ; or age and weak intellect, short of total incapacity, with no fiduciary relation and no ‘arts of inducement’ to condemn the grantee: Longmate v. Ledger 2 Giff 157 ; Anderson v. Elsworth 3 Giff 154 . Even the exuberant or ill-considered dispositions of feckless middle-aged women have had to yield to the same principle: Phillipson v. Kerry 32 Beav 628 ; Wollaston v. Tribe 9 Eq 44 .
He also concluded at p. 51:
In my judgment, without any regard to any question of undue influence, upon Lord Hatherley’s principle and the concurrent authorities the plaintiff by reason of his own weakness of mind, coupled with the deficiencies in the legal advice under which he acted and his unawareness, is entitled to have the improvident indenture of settlement, dated 24 October 1942, set aside and the Register of Freeholders rectified.
Whilst one might not agree with all of the classifications recognised by Gavan Duffy J the legal principle is stated clearly and is applicable to this case.
In light of the evidence of the omissions in relation to the legal advice given, the fact that there was no evidence that the transfer was read over to Thomas Carroll Senior, his frail health, his lack of practically any other assets, his relationship with his daughters and all the circumstances, there was clear evidence upon which the learned trial judge could come to the determination, which he did, at p.232, that:
This in my view is a clear case where the equitable jurisdiction can and should be invoked with a view to setting aside the transaction on the grounds of its improvidence.
I would affirm his conclusion.
Acquiescence Laches — decision
I am satisfied there are no grounds raised upon which the appeal on this point could succeed. On the evidence the respondents learnt of the transfer, obtained a copy thereof and issued proceedings all well within one year. I am satisfied that the learned trial judge was correct in his conclusion that there was no acquiescence by the respondents. Consequently, I would dismiss the appeal on this ground also.
Conclusion
I affirm the judgment and order of the High Court that the deed of 3 May 1990 should be set aside.
Grealish v Murphy
[1946] IR 35
Gavan Duffy J. 45
The settlement purports to make Peter Grealish, as beneficial owner, assign the farm absolutely as from Peter’s death to Thomas Murphy, his heirs and assigns, subject to a life interest in Peter; the land is expressly charged with a right for Murphy to reside in Peter’s house and to be supported and maintained out of the land during Peter’s life; Murphy for his part covenants with Peter, during Peter’s life, without reward to reside in the house and work and manage the land and sow and harvest the crops and attend to and take proper care of all farm stock and implements and the buying and selling of stock and generally to perform all the farm work and the duties of a labourer as required by Peter and (a very important covenant) duly and properly to account for all moneys expended or received by him on behalf of Peter; and Murphy covenants to pay Peter £1 a week for every week in which he fails to reside with Peter and to indemnify Peter for any loss and expense incurred on the maintenance or wages of any person employed by Peter to perform any work that Murphy may fail to do.
Thus Peter executed an improvident settlement, surrendering irrevocably his own absolute title for a life interest in consideration of personal covenants, backed by no adequate sanctions; the farm itself was hypothecated to secure the newcomer, beside whom Peter was a Croesus; and Peter was to be left for the remainder of his life very much at the mercy of a rather impecunious young man, who had no ties of blood and was still unproved as a friend. I think effective safeguards for Peter could have been devised, if there was to be a settlement, or alternatively Peter might have contracted to settle the property on Murphy by will, upon the lines suggested by Coverdale v. Eastwood (1);whatever plan was adopted, I think that suitable conditions could and should have been determined in negotiation between the solicitors for the parties, each of whom ought to have been separately represented. But these reflections are otiose, if the conclusive answer to Peter’s present claim is that he was separately advised by an independent solicitor.
That contention deserves careful examination and I have examined it with great care. I am satisfied that Peter received from an experienced solicitor advice that was absolutely independent and I am satisfied that the draft deed was settled by very able counsel, upon instructions reflecting, of course, the state of mind and knowledge of the solicitor. Nevertheless, the question of Peter’s actual understanding of the solemn document that he executed on October 20th, 1942, is a question of first importance. Dr. Comyn, who avows that he looked upon the settlement as a transaction similar to the three attempts which, as Peter told him, had broken down, says that he was absolutely satisfied that Peter understood the instructions he gave for the deed. I have no doubt that Peter did know that the deed would secure the land to Murphy at Peter’s death and that he knew generally the undertakings that Murphy was giving in return; Peter showed his own understanding of the young man’s obligations, when he formulated his grievance in his own words:”He (Murphy) did not do anything about the agreement; he failed. . . . He was bound to look after me and buy and sell and give up the moneywhat he did not do.” But the trouble is that the solicitor, whose advice was essential to Peter, did not advise en connaissance de causeand that Peter’s actual knowledge of what he was doing fell very short of the knowledge that the settlor ought to have had. That is the result in my mind of candid evidence from Dr. Comyn himself and of inferences thereform. Consequently the principle of Harrison v. Guest (1) and Coomber v.Coomber (2), that a competent assignor, who knows what he is doing, must be held to his deed, does not apply here.
The evidence proves that the solicitor did not know all the material facts, that he did not give Peter a complete explanation of the nature and effect of the deed, and that the duty of illuminating Peter’s benighted mind was more imperative and more formidable, if the task was possible, than the solicitor supposed.
First. Dr. Comyn did not get the facts. He did not ascertain the total of Peter’s property, nor the proportion between that total and the value of the farm at Carnmore; yet that was relevant and material information for an adviser. Still more important to be known was the fact that Peter had already placed £2,000 on deposit in the joint names of himself and Murphy, with Murphy’s ready acquiescence, under the illusion, known to Murphy, that this device would ward off the imaginary terrors of Dublin Castle. Murphy, knowing Peter for what he was, could not assume that Peter had mentioned the episode, still less that he had given an accurate account of it; Murphy ought to have told the solicitor all about it, but he persisted in his curious policy of silence. Perhaps Murphy did not know positively how silly Peter’s ruse was as a measure of defence, but he is intelligent enough, in my estimate of him, to have felt the transaction to be one of questionable virtue and of very dubious value, and, both for this reason and because he stood to gain a large sum of money from his pitiable patron, he ought to have spoken out at this juncture. Here was cogent evidence, had the solicitor and counsel known it, that Peter was and would be incapable of taking care of his own interests and that Peter and Murphy combined were and would be unequal to the burden of taking care of his property. Instead of favouring the projected settlement, as he did, Dr. Comyn must have gone into the whole affair very much more warily, had he known. He did not know, because, by agreement or coincidence, each of the two men vitally concerned said nothing.
Secondly. Peter was not told and did not realise how gravely he was committing himself and jeopardising his own interests; he probably understood neither the immediate pledging of his favour to Murphy nor the effect of that charge; certainly the difference between this deed and a will was not explained to him, nor the fact that the settlement was to be irrevocable and his alienation irretrievable, no matter how badly Murphy might behave, no matter what untoward development might supervene; and he was certainly not a man to apprehend the risks, at least without the clearest and most insistent exposition of them. What precautions were taken in the deed against the vicissitudes of life? Murphy might have mismanaged the farm hopelessly, for all the solicitor could tell; or, for all he could tell, Murphy might have taken to drink or gone to the devil or married a shrew who would make Peter’s life a torture; he might have become a bankrupt; he might have been sent to hospital for years, or been committed for some time to an asylum; he might even have been sentenced to imprisonment. Unlikely events, very unlikely? Perhaps, but why do I insure my house against fire, and how was the solicitor, a stranger to Murphy, to gauge the probabilities of an ensuing incapacity or incompetence? An act of God is always unlikely (before it happens) and the devil’s action may often seem unlikely too. And if some such calamity had smitten Peter, the law might or might not have given him some costly redress. It was unlikely, perhaps very unlikely, that the young man would predecease the old; but how deplorable would Peter’s position have been, if Murphy had died after a few months’ work under the deed and perhaps twenty years before Peter himself! However, Peter’s advisers had no more dark forebodings than their client. Clearly there were some important aspects of the deed far outside poor Peter’s ken, when he scratched his rude mark upon the paper.
Thirdly. The solicitor quite erroneously considered and treated Peter as a normal member of the farming community; in fact I think he treated him as a man of high intelligence. Taking his client to be a competent judge of his own man, the solicitor, who just knew Murphy to be a farmer’s son and no relative and Peter’s dumb attendant, made no inquiries at all as to Murphy’s antecedents, character, capacity or financial position; he assumed both the fitness of Murphy and the value of his covenants; he did not suspect how easily the young man might become master of the situation, nor how much he would be tempted to abuse his trust; and the deed reflects that kindly confidence; whether Dr. Comyn seriously expected Murphy to keep accounts, I do not know. No need was felt to appoint trustees; perhaps they would have been hard to find, but, had the solicitor realised the settlor’s weakness, he would have seen that Peter required and must have the protection for which trusts were invented. Unless there be a legal presumption of undue influence against Murphy, making other questions quite subordinate, I regard it as a matter of high importance that Peter’s advisers in this particular transaction should have been equipped to advise him with a just appreciation of his mental debility and his special need of protection. They were not so equipped and Peter did not get the circumspect advice and protection so necessary to him.
Now, how is Murphy affected by any criticism reflecting upon the advice under which Peter acted? I have shown that Murphy’s own conduct in the matter was not beyond reproach, but any impartial person will see that it is quite impossible to say that the deed was procured through Murphy’s undue influence, even if he did his part during nearly nine months, as he naturally would, to keep the old man’s ardour alive. Nor is this the familiar case in which the Court, from the relation of the parties, must presume undue influence until disproved positively by the recipient of the bounty; Murphy had constituted himself Peter’s interim confidential agent in January, 1942, and had thus placed himself in a very delicate position, an exceptionally delicate position in view of Peter’s mentality; but the undoubted fact is that some such transaction as that eventuating in the actual settlement had been expressly envisaged by the parties from the outset, before Murphy can have acquired any influence whatsoever; therefore I cannot fairly impute to him Peter’s decision to put the business on a legal basis as soon as the way was made clear by the final elimination of the Fox interest, the only obstacle. And Murphy in no way interfered with the drafting of the deed in the particular form which it took.
Peter had intended all through to leave the property to Murphy and to bind himself to that effect, in return for the precious services to be rendered by the vigorous young man to the rather helpless old one. As from January, 1942, Murphy had only to be kind to Peter, as he was, and to retain his goodwill, as he certainly did, in order to secure his reward from that eager benefactor. Besides, the plan was not originated by Murphy, but by Peter, and by Peter alone. Murphy on his side had faced appreciable risks in accepting Peter’s advances; and any picture of him as an adventurer, inveigling his witless victim into a trap in the October settlement, would be a caricature. Much as I blame Murphy for his reticence (partly perhaps through ignorance) as to the existence of his own solicitor and for his want of candour in suppressing the eccentric and disquieting £2,000 deposit in the joint names, I could not in common sense treat these faults as any evidence of undue influence in relation to the settlement on the facts; and, if Murphy throws doubt on the veracity of his own evidence concerning Peter’s alleged original offer to settle money on him, by his failure to mention that important promise to Dr. Comyn and his failure to call upon the solicitor to make good that promise in the deed, here again my criticism of Murphy as a witness is foreign to the issue of undue influence in fact and remote from any evidence that would raise a legal presumption of undue influence against Murphy, so far as the settlement is concerned.
The result is that the plaintiff’s attempt to set aside the deed on the ground of undue influence, whether actual or presumptive, by Murphy cannot succeed, and, if the deed had to stand or fall upon that issue, there would be nothing more to say. But the position in law as I see it, upon the pleadings, is not so simple as that; there is another crucial matter to be determined.
Peter cannot avoid the deed for undue influence; but his claim is further based on the improvidence of the transaction and also he directly alleges (though in connection with the charge of undue influence) his own mental incapacity; I think I can reasonably read these averments together without calling for an amendment of his pleadings.
The issue thus raised brings into play Lord Hatherley’s cardinal principle (from which the exceptions are rare) that Equity comes to the rescue whenever the parties to a contract have not met upon equal terms, see Lord Hatherley’s judgment (dissenting on facts) in O’Rorke v. Bolingbroke (1);the corollary is that the Court must inquire whether a grantor, shown to be unequal to protecting himself, has had the protection which was his due by reason of his infirmity, and the infirmity may take various forms. The deed here was in law a transaction for value: Colreavy v. Colreavy (2);however tenuous the value may have proved to be in fact, and, of course, a Court must be very much slower to undo a transaction for value; but the fundamental principle to justify radical interference by the Court is the identical principle, whether value be shown or not, and the recorded examples run from gifts and voluntary settlements (including an abortive marriage settlement) to assignments for a money consideration. The principle has been applied to improvident grants, whether the particular disadvantage entailing the need for protection to the grantor were merely low station and surprise (though the grantor’s rights were fully explained): Evans v. Llewellin (1), or youth and inexperience: Prideaux v. Lonsdale (2); Everitt v. Everitt (3), or age and weak intellect, short of total incapacity, with no fiduciary relation and no “arts of inducement” to condemn the grantee: Longmate v. Ledger (4); Anderson v. Elsworth (5).Even the exuberant or ill-considered dispositions of feckless middle-aged women have had to yield to the same principle: Phillipson v. Kerry (6); Wollaston v. Tribe (7).
The principle prevailed, when the deed was “the most honest thing in the world” so far as the settlor and her solicitor were concerned: Everitt v. Everitt (3), and though the evidence of the solicitor acting for the grantor was fully accepted: Phillipson v. Kerry (6), and again where the deed had been prepared by the grantor’s own solicitor, a man of honour, but the grantor, while fully understanding the benefit to accrue to the grantee, had not fully understood the effect of her deed as it affected her own interests: Anderson v. Elsworth (5); in several other instances the inadequacy of the explanations given to the grantor has been a conspicuous, indeed a decisive, factor in the Court’s action against an improvident deed, the Court either assuming: Prideaux v. Lonsdale (2), or having direct evidence: Phillipson v. Kerry (6); Wollaston v. Tribe (7), to prove a serious lack of understanding. The least the Court can demand is that an infirm grantor shall have known what he was doing. In the much more frequent, but analogous, instances of deeds attacked for undue influence the Judicial Committee has insisted that the donor must have had a complete explanation of the nature and effect of the transaction, from an advisor who himself knew all the relevant circumstances: Inch Noriah v. Shaik Allie Bin Omar (8), even where the advisor was selected by the donor: Williams v. Williams (9),and the same imperative requirement was stressed in a transaction for value by Isaacs J. upon a deed closely resembling the deed in this action in some aspects, but obtained by undue influence: Watkins v. Combes (1).
In my judgment, without any regard to any question of undue influence, upon Lord Hatherley’s principle and the concurrent authorities the plaintiff by reason of his own weakness of mind, coupled with the deficiencies in the legal advice under which he acted and his unawareness, is entitled to have the improvident indenture of settlement, dated October 24th, 1942, set aside and the Register of Freeholders rectified.
I may add that the balancing of equities is not complicated here by any plea of estoppel, nor have I on the evidence any reason to suppose that the defendant has suffered any prejudice worth mentioning through executing the settlement.