The Times
October 12 2001

Women secure home rights in test case

BY FRANCES GIBB, LEGAL EDITOR

A WOMAN is less likely to lose her home because of her partner’s inability to make loan repayments, after a House of Lords ruling yesterday. It gives greater protection to a woman’s share of the family home when she stands surety for a partner’s debts.

It was given after eight women brought a test case. Law lords told lenders that they must do more to protect wives who sign over their interest in a property to protect a partner’s loan.

The women have battled for years and some of them now have the chance to reclaim their share of a repossessed property from their lender.

Judith Moore, one of the eight, said: “I am absolutely delighted. As a result of the ruling I will now go back to the county court and argue that the building society is not entitled to the charge on the mortgage.”

Mrs Moore and her husband lost their home in Pangbourne, near Reading, after their bank sought repossession when they fell behind with remortgage repayments. “It has been a long battle over seven years, but we hope now we will win at trial.”

The law lords held that a bank’s charge over a property could not be enforced unless it had checked directly and privately with the wife that she was receiving independent legal advice before signing.

Richard Holt, a solicitor for one of the wives involved, said after the ruling that married women were often persuaded to sign bank charges to raise loans on the matrimonial home “at times of great emotional vulnerability”.

Giving judgment, Lord Nicholls of Birkenhead said that the bank should not proceed with the transaction until it had received an appropriate response directly from the wife. It should become routine practice for banks, when relying on confirmation from a wife’s lawyer, to send the solicitor details of her husband’s finances, including his debts, overdraft facility and the amount of the new loan.

If the husband refused to consent to the release of this information, the transaction would not be able to proceed, Lord Nicholls, sitting with Lords Bingham of Cornhill, Clyde, Hobhouse of Woodborough and Scott of Foscote, ruled.

The eight women claimed that the fact that they were standing surety for their husbands’ debts meant that the banks were “put on inquiry”. They claimed that they could have acted under the “undue influence” of their husbands when they signed, and that the banks had failed to bring home to them the risks involved.

The appeal centred on whether banks have a responsibility to ensure that a partner — whether husband, wife, unmarried or homosexual — receives proper advice from an independent source.

Lord Nicholls said: “A bank is put on inquiry whenever a wife stands as surety for her husband’s debts. The bank must then take reasonable steps to bring home to the wife the risks involved.”

The law lords allowed some of the appeals, but dismissed others, depending on the individual facts of each case.

Hilary Messer, partner with Richard Wilson & Co, solicitors in Pangbourne, said: “This ruling is very welcome. It has implications for every solicitor, every small business and every lender in the country.

“It reinforces the principle that lenders must take certain steps to ensure wives are not under ‘undue influence’. It also sets out the reasonable obligations for solicitors when advising wives.”

Richard Holt, the solicitor for one wife, said that until now the law had considered it acceptable for the wife to receive advice from the husband’s solicitor, “who has every reason not to discourage her from entering into the transaction”.

“All we were asking for was a chance for the wife to be advised on her own in her own solicitor’s office, to be given hard advice in the absence of her husband,” he said.

Mr Holt said that perhaps in some cases the advice should be: “Let your husband go bankrupt; his half share of the house will be lost, but yours will be preserved; you can take your half share and rebuild your lives together; don’t sacrifice your share here — the deal is no good for you.”

Some lending banks said that they already insist on partners seeking independent legal advice. Others said that they would study the judgment and, if necessary, make changes to their procedures.

The Times Law Report
October 17 2001

Requirements for enforcing lender's security

HOUSE OF LORDS

Royal Bank of Scotland plc v Etridge (No 2)
Barclays Bank plc v Harris
Midland Bank plc v Wallace
National Westminster Bank plc v Gill
Barclays Bank plc v Coleman
UCB Home Loans Corporation Ltd v Moore
Bank of Scotland v Bennett
Kenyon-Brown v Desmond Banks & Co

Before Lord Bingham of Cornhill, Lord Nicholls of Birkenhead, Lord Clyde, Lord Hobhouse of Woodborough and Lord Scott of Foscote

Speeches October 11, 2001

Where it was proposed that a wife should charge her interest in her home in favour of a bank as security for the indebtedness of her husband or his business, specific clear and simple procedures should be operated in future, as minimum requirements, to protect the wife and to reduce to an acceptable level the risk that she had been misled or coerced by her husband so that the lender might make the advance in reasonable confidence that, if necessary, the security would be enforceable.

The House of Lords so stated when identifying appropriate protective procedures to be adopted in future cases and:

(i) allowing the appeals of Mrs Harris, by her personal representative Mr Harris, Mrs Wallace and Mrs Moore, and dismissing the appeals of Mrs Etridge and Mrs Gill from the Court of Appeal (The Times August 17, 1998; (1998) 4 All ER 705) which had ruled in favour of the respective lenders, Barclays Bank plc, Midland Bank plc, UCB Home Loans Corporation Ltd, Royal Bank of Scotland plc and National Westminster Bank plc;

(ii) dismissing the appeal of Mrs Coleman from the Court of Appeal (The Times January 5, 2000; (2001) QB 20) which had ruled in favour of Barclays Bank plc;

(iii) allowing the appeal of Mrs Bennett from the Court of Appeal ((1999) 1 FLR 1115) which had given judgment in favour of the Bank of Scotland; and

(iv) allowing the appeal of Desmond Banks & Co from the Court of Appeal ((2000 PNLR 266) which had ruled in favour of Mrs Kenyon-Brown's claim for damages for professional negligence.

The other cases concerned claims by lenders to enforce charges given over their homes by wives as security for the indebtedness of their husbands or their businesses.

Mr Richard Mawrey, QC and Mr Simon Wheatley for Mrs Etridge; Mr Michael Briggs, QC and Miss Amanda Harington for the Royal Bank of Scotland.  Mr Jules Sher, QC and Mr Stephen Whitaker for Mr Harris; Mr John Jarvis, QC and Mr David Wolfson for Barclays Bank.  Mr Jules Sher, QC and Mr Mark Lyne for Mrs Wallace; Mr Michael Briggs, QC and Mr Clive H, Jones for Midland Bank.  Mr Jules Sher, QC and Mrs Teresa Rosen Peacocke for Mrs Gill; Mr Michael Lerego, QC and Mr Nicholas Briggs for National Westminster Bank.  Mr Jules Sher, QC and Mrs Helene Pines Richman for Mrs Coleman; Mr John Jarvis, QC and Mr David Wolfson for Barclays Bank.  Mr Jules Sher, QC and Mr Bernard Devlin for Mrs Moore; Mr Michael Briggs, QC and Mr Christopher Coney for UCB Home Loans Corporation Ltd;  Mr Nicholas Yell for Mrs Bennett; Mr John Jarvis, QC for Bank of Scotland;  Mr Jonathan Sumption, QC and Mr Ben Hubble for Desmond Banks & Co; Miss Julia Smith for Mrs Kenyon-Brown.

LORD NICHOLLS, having discussed the general principles applicable to cases such as those of the wives on the present appeals and referred to Barclays Bank plc v O'Brien (The Times October 22, 1993; (1994) 1 AC 180), set out the guidance he proposed as the core minimum to the applied in future to reduce the risk of error, misunderstanding or mishap to an appropriate level.

The threshold: when the bank was put on inquiry

The bank was put on inquiry whenever a wife offered to stand surety for her husband's debts. The position was likewise if the husband stood surety for his wife's debts; similarly in the case of unmarried couples, whether heterosexual or homosexual, where the bank was aware of the relationship.

On the other side of the line where money was advanced to the husband and wife jointly, the bank was not put on inquiry unless it was aware the loan was being made for the husband's, as distinct from their joint, purposes.

Less clear cut was the case where the wife became surety for the debts of a company whose shares were held by her and her husband. Her shareholding might be nominal, or a minority or an equal shareholding with her husband.

The bank was put on inquiry in such cases even when the wife was a director or company secretary. Such cases could not be equated with joint loans.

The steps a bank should take

In O'Brien it was stated that a bank could reasonably be expected to take steps to bring home to the wife the risk she was running and to advise her to take independent advice.

That test was applicable to past transactions, into which category the present appeals fell; for the future the bank was to insist that the wife attend a private meeting with its representative at which she was told of the extent of her liability and of the risk she was running and she would be urged to take independent advice.

Exceptionally, to be safe the bank had to insist on the wife being separately advised.

It was clear that banks were unwilling to assume the responsibility of advising the wife at such a meeting, their practice was, currently as before, to require the wife to seek legal advice and itself to seek written confirmation from a solicitor that he had explained the nature and effect of the documents to her.

It was plainly neither desirable nor practicable that banks should be required to attempt to discover for themselves whether her consent was being procured by undue influence, nor should the banks be expected to insist on confirmation from a solicitor that he had satisfied himself that her consent was not so procured.

The furthest that a bank could be expected to go was to take reasonable steps to satisfy itself that she had had brought home to her, meaningfully, the practical implications of the proposed transaction.

That did not wholly eliminate the risk of undue influence or misrepresentation, but it did mean that she entered into a transaction with her eyes open so far as its basic elements were concerned.

That was the point at which, in O'Brien, the House decided that the balance between the competing interests should be held.

A bank might itself provide the necessary information directly to the wife. It was best equipped to do so but banks were not following that course and provided a suitable alternative was available they ought not to be compelled to do so. It was not unreasonable for them to prefer that that task should be undertaken by an independent legal adviser.

Content of legal advice

It was not for the solicitor to veto the transaction by declining to confirm to the bank that he had explained the documents and the attendant risks to the wife. If he considered the transaction not in her best interests he would give her reasoned advice to that effect.

But at the end of the day the decision whether to proceed was that of the client not the solicitor. A wife was not to be precluded from entering into a financially unwise transaction if for her own reasons she wished to do so.

That was the general rule. There might be exceptional circumstances where it was glaringly obvious that the wife was being grievously wronged. Then the solicitor should decline to act further.

The scope of the solicitor's responsibilities had to start with his retainer the terms of which, whether express or implied, dictated the scope of his duties.

The relevant retainer stemmed from the bank's concern to receive confirmation from the solicitor that he had brought home to the wife the risks involved in the proposed transaction.

As a first step he would need to explain to her the purpose for which he was involved at all: that, should it become necessary, the bank would rely on 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 would need to obtain her confirmation that she wished 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 that effect was forthcoming, the content of the advice required from the solicitor, before giving the confirmation sought by the bank, would inevitably depend on the particular circumstances. Typically the advice should cover the following matters as the core minimum.

1 The solicitor would need to explain the nature of the documents and the practical consequences they would have for her if she signed them: she could lose her home if the husband's business did not prosper, her home might be her only substantial asset, she could be made bankrupt.

2 The solicitor would need to point out the seriousness of the risks involved. the wife should be told the amount of her liability under her guarantee, the purpose of the proposed new facility, its amount and principal terms, that the bank might increase the amount of the facility, change its terms, or grant a new facility without reference to her.

The solicitor should discuss her financial means, including her understanding of the value of the property concerned, and whether she or her husband had other assets from which repayment could be made if his business should fail. Those were matters relevant to the seriousness of the risks involved.

3 The solicitor would need to state clearly that she had a choice. The decision was hers alone. Explanation of the choice she faced would call for some discussion of the present financial position, including the amount of the husband's present indebtedness and of his current overdraft facility.

4 The solicitor would need to check whether the wife wished to proceed. She should be asked whether she was content for him to write to the bank confirming he had explained to her the nature of the documents and the practical implications they might have for her or whether, for instance, she would prefer him to negotiate on the terms with the bank. Matters for negotiation could include the sequence in which the various securities would be called on or a specific or lower limit to her liabilities. He should not give any confirmation to the bank without her authority.

His discussion with the wife should take place at a face-to-face meeting in the absence of the husband. It went without saying that his explanations should be couched in suitably non-technical language and that his task was important and not a formality.

He should obtain from the bank any information he needed. If the bank failed for any reason to provide the information requested he should decline to provide the confirmation.

Independent advice

A clear simple rule was needed, preferably of well nigh universal application. The solicitor might also act for the husband or the bank provided he was satisfied that that was in the wife's best interests and that it would not give rise to any conflict of duty or interest. The advantages of a solicitor acting solely for the wife did not justify the additional expense that that would involve for the husband. When accepting her instructions, the solicitor assumed responsibilities directly to her: they were owed to her alone. In advising her he was concerned only with her interests. In every case he had to consider carefully whether there was any conflict of duty or interest and, more widely, whether it would be in her best interest for him to accept instructions from her. If he did, his assumption of legal and professional responsibilities to her ought to provide sufficient assurance that he would give the requisite advice fully, carefully and conscientiously. If at any stage he became concerned that there was a real risk that other interests or duties might inhibit his advice to the wife he had to cease to act for her.

Agency

If the solicitor failed to act properly, she had a remedy in damages for negligence against him. Considering the bank's position in that situation, confirmation from the solicitor that he had advised the wife was one of the bank's pre-conditions for completion of the transaction. But it was central to the arrangement that the solicitor in advising the wife was acting for her and no one else. The bank did not have, and was not intended to have, any knowledge of or control over that advice; the solicitor was not accountable for it to the bank. To impute to the bank knowledge of what passed between the wife and the solicitor would contradict that essential feature of the arrangement. The mere fact that the bank asked the solicitor, for its own purposes, to advise the wife did not make him the bank's agent in giving that advice. In the ordinary case deficiencies in the advice were a matter between the wife and solicitor; the bank was entitled to proceed on the assumption that the solicitor had done his job advising the wife properly.

Obtaining the solicitor's confirmation.

The bank should take the following steps when it had been put on inquiry and for its protection was looking to the fact that the wife had been independently advised by a solicitor.

1 The bank should check directly with her the name of the solicitor she wished to act for her. To that end in future it should communicate directly with her, informing her that for its own protection it would require written confirmation from a solicitor, acting for her, to the effect that the solicitor had fully explained to her the nature of the documents and the practical implications they would have for her.

She should be told that the purpose of that requirement was that thereafter she should not be able to dispute she was legally bound by the documents once she had signed them. She should be asked to nominate a solicitor whom she was willing to instruct to advise her, separately from her husband, and act for her in giving the confirmation.

She should be told that if she wished it might the same solicitor who was acting for her husband in the transaction; if the solicitor was already acting for the husband and wife, she should be asked whether she would prefer that a different solicitor should act for her regarding the confirmation.

The bank should not proceed with the transaction until it had received an appropriate response directly from her.

2 Representatives of the bank were likely to have a much better picture of the husband's financial affairs than the solicitor.

If the bank was not willing to undertake the task of explanation itself, it had to provide the solicitor with the financial information he needed for that purpose.

It should become routine practice for banks, if relying on confirmation from a solicitor for their protection, to send the solicitor the necessary financial information.

What was required had to depend on the facts: ordinarily it would include information on the purpose for which the proposed new facility was requested, the current amount of the husband's indebtedness, the amount of his current overdraft facility, the amount and terms of any new facility and, if the husband had applied for the facility in writing, a copy of his application.

The bank would need first to obtain the consent of its customer to that circulation of confidential information: if consent were not forthcoming the transaction would not be able to proceed.

3 Exceptionally, there might be a case where the bank believed or suspected that the wife had been misled by the husband and was not entering the transaction of her own free will. In such a case the bank had to inform the wife's solicitors of the facts giving rise to the belief or suspicion.

4 The bank should in every case obtain from the wife's solicitor a written confirmation to the effect his Lordship had mentioned.

Those steps would apply to future transactions; in respect of past transactions, the bank would ordinarily be regarded as having discharged its obligations if a solicitor who was acting for the wife in the transaction gave the bank confirmation to the effect that he had brought home to her the risks she was running by standing as surety.

Lord Bingham delivered a speech agreeing with Lord Nicholls and Lord Scott. Lord Clyde and Lord Hobhouse delivered speeches agreeing with Lord Nicholls and concurring with Lord Scott. Lord Scott delivered a speech agreeing with Lord Nicholls and disposing of the individual appeals.

Solicitors: Collins, Watford; Fladgate Fisher.  Evans Derry Binnion, Birmingham; Rowe & Maw.  Keppe Shaw, Twickenham; Tarlo Lyons.  Baxter & Co, Bournemouth; Osborne Clarke, Bristol.  Waller & Co; Nicholas Graham Jones.  Richard Wilson & Co, Pangbourne; Copley Clark & Bennett.  Trevor Jenkin & Co; Underwood & Co.  Henmans; Neilson & Co.