AFTER ETRIDGE: THE ENDGAME FOR BANKS AND NON-COMMERCIAL SURETIES?S.B. MIDWINTER BA LLM, of the Middle Temple, Barrister, midwinter@brickcourt.co.ukNational Westminster Bank v Amin UCB Corporate Services v Williams The Bank of Scotland v Hill and Tudor
THE decision of the House of Lords in Royal Bank of Scotland v Etridge (No 2) [2001] 3 WLR 1021 was intended to provide a clear and principled solution to the recently engendered legal confusion regarding the relationship between banks and non-commercial sureties (usually the borrower's wife) who claimed to have been caused to agree to guarantee a loan by the exertion of undue influence on the part of the borrower. The stated aim of the House of Lords was to effect a balance between the need to protect the property rights of the vulnerable and the need to ensure that people are generally free to make use of their property as collateral (see e.g. Lord Nicholls at para 34). In order to achieve this, it was necessary to set out what Lord Bingham (at para 2) described as "clear, simple and practically operable" guidelines as to what lending banks should do when entering into an agreement with a non-commercial surety. The essence of these is that banks should take reasonable steps to ensure that the surety has the transaction properly explained to him or her. In practice, this means requiring the surety to obtain independent legal advice. Since that decision, three further cases have reached the appellate courts. However, this should not be taken as suggesting a failure in Etridge; rather, these cases represent the application of that decision to cases initially decided before the House of Lords' judgment. As such, they show the way that Etridge will work in practice and provide some useful indicators as to how banks can ensure that they obtain an enforceable security.
1. National Westminster Bank v Amin [2002] UKHL 9The first case involved an application by a mortgagee bank to strike out a defence based upon the undue influence exercised over Mrs Amin by her businessman son. The bank had instructed solicitors to explain the transaction to Mrs Amin and her late husband (neither of whom spoke English) and had duly received confirmation that this had been done. It was alleged that the solicitor was an agent for the bank. The House of Lords held that this was an issue that needed to go to trial: if the solicitor was acting for the bank, rather than the sureties, then his advice may not have constituted the independent legal advice required by Etridge. Interestingly, Lord Scott (with whom all the others agreed), felt that there were features in the case that might take it beyond the "ordinary case" envisaged by Lord Nicholls in Etridge. This was chiefly based upon the evidence (unchallenged at this stage) that the bank knew that the couple could not speak English and were therefore "specially vulnerable to exploitation" (para 24). The bank had also, in its instructions to the solicitors, referred to the task at hand as being to undertake "the formalities", an expression described by Lord Scott as being "totally inapt" (ibid. Cf. "It also goes without saying that the solicitor's task is an important one. It is not a formality." Lord Nicholls in Etridge para 66). This emphasises that, where banks have special knowledge as to a characteristic of the customer rendering him or her particularly liable to exploitation, the Etridge requirements may be stricter than in the ordinary case. However, it seems likely that ensuring that independent legal advice is obtained would still be sufficient to negate even this stricter duty: in Amin, the problem was caused by the fact that, on the evidence, the bank's chosen solicitor could not speak the same language as those to whom he had "explained" the transaction. Presumably if the confirmation had come from a solicitor chosen by the couple the problem would have been avoided, as the bank would have been entitled to assume that they had chosen a solicitor with whom they could communicate. In the final analysis, even those in the vulnerable position illustrated by the facts of Amin must be permitted to exercise their own judgment (see Etridge, para 61 per Lord Nicholls).
2. UCB Corporate Services v Williams [2002] EWCA Civ 555Mrs Williams agreed to the use of the marital home as collateral for loans to a company in which her husband was a partner. The trial judge held that her agreement had been procured by undue influence and misrepresentations as to the nature of the documents being signed and that UCB had not advised Mrs Williams to seek independent advice, though they did know that she was being represented by a solicitor. Two questions were raised before the Court of Appeal; first as to whether it mattered that the judge had held that Mrs Williams would have signed the document in any event ("the causation issue") and second, whether UCB could take advantage of the fact that, unbeknown to them, Mrs Williams had in fact received legal advice, to avoid the burden of constructive notice. The answer to both questions was "No". With regard to the causation issue, Jonathan Parker LJ held that the decision of the House of Lords in CIBC Mortgages v Pitt [1994] 1 AC 200 established that the injured party is entitled to set aside the transaction "as of right" (para 91). There is thus no need to examine what the influenced party would have done in other circumstances. With respect, this is surely right. This is an equitable remedy, and where the conscience is affected by wrongdoing, the fact that the party wronged may have acted in accordance with the wrongdoer's wishes anyway is quite incapable of turning unconscionable behaviour into acceptable conduct, or of rendering enforceable a tainted agreement. The argument on constructive notice was largely doomed to failure by Etridge. The only remaining argument was to suggest that, since Mrs Williams had coincidentally received legal advice, the bank's duty was fortuitously discharged. The Court held that this failed because, amongst other things, the quality of the advice had been so poor. It is interesting to note that, had the advice been better, this would not have prevented the bank from being fixed with constructive notice, because, as Parker LJ pointed out (para 98), one cannot avoid being fixed with notice by a fact unknown at the time and about which no enquiries were made. What would have happened, however, is that, as has been made clear in Etridge, the bank would have been able to rebut the presumption of undue influence altogether by showing that Mrs Williams had made an informed choice. It was made quite clear (see in particular Lord Scott at para 168) that knowledge that there is a solicitor involved will not suffice to discharge the bank's burden. The bank must be at least minimally pro-active, encouraging the surety to seek advice about the consequences of the agreement. Without this active role, the possibility that important matters will never have been brought to the surety's attention remains. The only remaining argument was to suggest that, since Mrs Williams had coincidentally received legal advice, the bank's duty was fortuitously discharged. The Court held that this failed because, amongst other things, the quality of the advice had been so poor. It is interesting to note that, had the advice been better, this would not have prevented the bank from being fixed with constructive notice, because, as Parker LJ pointed out (para 98), one cannot avoid being fixed with notice by a fact unknown at the time and about which no enquiries were made. What would have happened, however, is that, as has been made clear in Etridge, the bank would have been able to rebut the presumption of undue influence altogether by showing that Mrs Williams had made an informed choice.
3. The Bank of Scotland v Hill and Tudor [2002] EWCA Civ 1081Ms Tudor had agreed to remortgage the marital home to support her husband's business. In an application by the bank for summary judgment, it was presumed before the Court of Appeal that she had only agreed due to undue influence. There was evidence that the couple had jointly received independent legal advice, and the sole question was whether the form given by the solicitor to the bank, stating that "all joint borrowers… have received legal advice" was sufficient to discharge the bank's duties. Ms Tudor's argument was that the form was inadequate because it failed to make specific mention of advice having been provided to her on the specific matters required. This argument was unanimously rejected. Robert Walker LJ made reference to the fact that all solicitors engaged in this type of work would know what was meant by the wording of the form and held that it was not for the bank to enquire as to whether the solicitors had done their job properly. Of the three cases, this is nearest to the "ordinary case". It makes it plain that, unless there are highly unusual circumstances of which the bank is aware, confirmation from an independent solicitor that advice has been given will suffice. The bank had not set out precisely what the solicitor should say to Ms Tudor, but as the Court of Appeal recognised, to require it to do so would be quite unrealistic- the object of the exercise being to ensure that the surety receives advice from someone independent of the (non legally qualified) perspective of the bank.
ConclusionWhile the courts may yet have some work to do in clarifying the legal niceties of the post-Etridge world of non-commercial sureties, that judgment represents a pellucid and principled way forward. The cases discussed here show that, in general, it is easy for banks to ensure that their securities will be enforceable. However, where the simple safeguards are not complied with, the courts will continue to protect sureties and joint borrowers. It is submitted that these decisions demonstrate that Etridge, though it appears to put the banks in a strong position, is not an invitation to irresponsible lending, but a commercially sensible and legally sound manner by which the needs of everyone involved can be fulfilled. Notably, it manages to do so without succumbing to the outdated and patently false notion that women who choose to get married need always to be treated as a particular class of helpless unfortunates unable to make properly informed decisions (cf Garcia v National Australia Bank (1998) 194 CLR 395). It is interesting to note that this new clarity and justice has been achieved without recourse to the idea, fashionable amongst academics, that these cases should be treated as an example of 'unjust enrichment'. The simple truth is that unjust enrichment doctrine, had it been allowed to infect the judges' reasoning in any of the cases mentioned here, would have been an unnecessary confusion at best and a positively harmful obstacle in the way of a commercially and jurisprudentially acceptable solution at worst. The rules of equity and contract have proved admirably malleable tools, and while progress in legal thought is always to be welcomed, it must be doubted whether unjust enrichment's incursions into this field represent progress at all. September 2002 |