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Published online by Cambridge University Press: 02 January 2018
In the twin cases of Barclays Bank Plc v O’Brien and CIBC Mortgages Plc v Pitt the House of Lords consided for the first time an issue which has fresuently troubled the lower courts in recent years. In essence the issue can be boiled down to the following question:
Where a debt owed by A to C is guaranteed by B, in what circumstances will the fact that A induced B to make the guarantee by misrepresentation, undue influence or other conduct of which Equity disapproves, render the guarantee voidable by B against C?
(This simplified scenario, where A is the principal debtor, C the creditor, and B the guarantor, will be used in much of what follows). The contemporary significance of the question, and the difficulty which it has posed to the courts, are graphically shown by the fact that it has given rise to eleven reported decisions by the Court of Appeal in the last eight years.
1. [1994) AC 180.
2. [1994) AC 200.
3. The number count is stated by Lord Browne-Willkinson in O'Brien, [1994) AC 180 at 185H. The eleven cases appear to be the following:.
Avon Finance Co Ltd v Bridger (1985) 2 AII ER 281;.
Coldunell Ltd v Gallon (1986) QB 1184;.
Kings North Trust Ltd v Bell (1986) 1 WLR 119, (1986) 1 All ER 423;.
Perry v Midland Bank Plc (1987) 8 FLR 237;.
Bank of Baroda v Shah (1988) 3 AII ER 24;.
Midland Bank Plc v Shephard (1988) 3 AII ER 17;.
Barclays Bank Plc v Kennedy (1989) 1 FLR 356;.
Bank of Credit & Commerce International SA v Aboody (1990) 1 QB 923;.
Lloyds Bank Plc v Egremont (1990) 2 FLR 351, together with O'Brien and Pitt.
See also Cornish v Midland Bank Plc (1985) 3 All ER 513, followed by the High Court in Barclays Bank Plc v Khaira (1992) 1 WLR 623, where the Court of Appeal rejected the argument that the creditor bank owed a fiduciary duty direct to the guarantor wife; and cf the earlier case of Lloyds Bank Ltd v Bundy (1975) QB 26. There have also been decisions in other Commonwealth jurisdictions, principally Australia, Canada and New Zealand; some are cited, principally by counsel, in O'Brien and Pitt.
Similar concerns about onerous guarantees have also arisen in continental law. In Germany, protection of the vulnerable has been raised to the level of constitutional principle: see the remarkable case in the German Constitutional Court (Bundesverfassungsgericht) noted in (1994) Consum LJ C39 (I am indebted to Geraint Howells for this reference).
4. See, for example, Barclays Bank Plc v Kennedy, above.
5. [1994) AC 180 at 194A.
6. [1993) QB 109 at 136H.
7. See Cretney ‘The Little Woman and the Big Bad Bank’ (1992) 108 LQR 534.
8. Howes v Bishop (1909) 2 KB 390; Bank of Montreal v Stuart (1911) AC 120. The latter case was expressly approved by the House of Lords in O'Brien.
9. [1985) AC 686.
10. Bank of Credit & Commerce International SA v Aboody (1990) 1 QB 923.
11. [1994) AC 180 at 195A.
12. [1994) AC 180 at pp 195G–196B.
13. [1994) AC 180 at 196D-F.
14. [1994) AC 180 at 198C-E.
15. [1994) AC 180 at 198E-F, approving the result (but not the reasoning) in Avon Finance Co Ltd v Bridger (1985) 2 AII ER 281. It is submitted that this principle should not be limited to family relationships; a trusting relationship could, for instance, exist between friends or neighbours. The limiting principle is the state of the creditor's knowledge.
16. [1990) 1 QB 923.
17. [1985) AC 686.
18. The reported facts of the case the case seem rather to involve actual undue influence.
19. This was taken from Bank of Credit & Commerce International SA v Aboody (1990) 1 QB 923 at 953.
20. [1994) AC 200 at 209E.
21. [1994) AC 180 at 196F-H-197A-B.
22. Lloyds Bank Ltd v Bundy (1975) QB 326, might be an example.
23. See Black J in Provincial Bank of Ireland v McKeever (1941) IR 471 at 485–6 (cited by Sheridan, Fraud in Equity, p. 103): ‘One cannot expect absolute disproof of undue influence. It is enough to establish a reasonable probability of the exercise of independent will founded upon adequate understanding … The Courts have, I think, contemplated that the proof of independent advice having been given may in certain cases alone suffice. It seems to me that a combination of surrounding circumstances might furnish as good evidence, imperfect though it be, of the probability of an independent will as any independent advice. After all, a main object of such advice is to ensure that the party knows what he is doing. If the transaction is of such plain a character that it may fairly be believed that he did know what he was doing, that object is achieved without advice. Even the best independent advice, if not understood, might not achieve it.’.
24. See O'Brien (1994) AC180 at 188G-H, Pitt (1994) AC 200 at 211E-G. Cf Belinda Fehlberg ‘The husband, the bank, the wife and her signature’ (1994) 57 MLR 467. She argues that people, especially females, in the position of Mrs Pitt, may be subjected to a variety of emotional pressures, ranging across the spectrum from physical abuse to subtle and insidious persuasion; she then asks, ‘why not require creditors to meet every borrower or security provider, regardless of the transaction?’ For the reasons briefly advanced in the text the present writer does not find this argument persuasive. She does, however, proceed to make the very valuable point that the real key to the future lies in advancing public awareness of the financial risks involved in providing security; education, media campaigns and pressure pup activity all have an important part to play.
25. See, for example, Kingsnorth Finance Co Ltd v Tizard (1986) 1 WLR 783 (1986) 2 All ER 54.
26. This point was made by Nicholas Bamforth at the Chancery Bar Association Seminar, reported at (1994) Conv 349 at 351; it was also made by an anonymous referee of the present article, to whom the writer is grateful.
27. See, for example, O'Sullivan v Management Agency and Music Ltd (1985) QB 428 at 464B, per Fox LJ, and consider the notice which is required to impose liability on a person who has knowingly assisted a breach of trust.
28. Cf n 24, above.
29. Note 12 and associated text, above.
30. Swadling, All ER Rev 1993 at 367, makes this same point, but then, with respect, draws the wrong conclusion, suggesting that, since there is only one transaction, the doctrine of notice is not relevant at all. For the reasons subsequently explained in the text, notice is relevant, but not in the manner suggested by Lord Browne-Wilkinson.
31. Of course, A was a party to the impugned transaction in O'Brien and Pitt, since that transaction was a joint mortgage; the analysis in the text remains valid, however, since the wife's complaint against the mortgagee was based on the husband's fraud, and the husband was not a grantee.
32. (1807) 14 Ves. 273; this case was cited in argument in O'Brien, but is not referred to in their Lordships' opinions. See also Goddard v Carlisle (1821) 9 Pr 169; Liles v Terry (1895) 2 QB 679; Bullock v Lloyds Bank Ltd (1955) Ch 317.
33. See Molony v Kernan (1842) 2 D & War 31; Cobbett v Brock (1855) 20 Beav 524; Bainbrigge v Browne (1881) 18 Ch D 188; and cf Tabor v Cunningham (1875) 24 WR 153.
34. Since this article was written, essentially the same argument has been put forward by Dixon and Harpum at (1994) Conv 421.
35. See notes 50–52 and associated text, below.
36. Wilkes v Spooner (1911) 2 KB 473.
37. Cf Thompson in (1994) Conv 140 at 144, and the reply by Dixon and Harpum (1994) Conv 421.
38. Westminster Bank Ltd v Lee (1965) Ch 22; National Provincial Bank Ltd v Ainsworth (1965) AC 1175; Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265; Shiloh Spinners Ltd v Harding (1973) AC 691 at 721, per Lord Wilberforce; Blacklocks v J B Developments (Godalming) Ltd (1982) Ch 183.
39. In Bainbrigge v Browne (1888) 18 ChD 188 at 197, Fry J described the right to rescind for undue influence as an equity, and refused to rescind as against the defendants, who were mortgagees of an equitable interest taking without notice. But that was a one-transaction case, so that, even if we assume that Fry J was using the word ‘equity’ in the sense of a mere equity and deliberately deciding that the legal estate was unimportant, it is not a direct authority on the position of successors in title.
40. (1965) 113 CLR 265.
41. Land Registration Act 1925, s 59(6). See De Lusignan v Johnson (1973) 230 EG 499; Kemmis v Kemmis (1988) 1 WLR 1307 at 1332E, per Nourse LJ.
42. Of course, there is plenty of room for debate as to the meaning of ‘good faith’, but, in view of s 59(6), the decision in Peffer v Rigg (1977) 1 WLR 285, (1978) 3 All ER 745, cannot possibly be correct. The definition of ‘good faith’ in Smith v Morrison (1974) 1 AII ER 957 is to be preferred.
43. Barclays Bank Ltd v Taylor (1974) Ch. 137; Mortgage Corporation Ltd v Nationwide Credit Corporation Ltd (1994) Ch 49. The Law Commission has recommended that the priority between minor interests should be governed by the order of their protection on the register: Law Com No 158, para 4.98.
44. Land Registration Act 1925, s 70(1)(g).
45. Blacklocks v J B Developments (Godalming) Ltd (1982) Ch 183.
46. Actual occupation, or receipt of rents and profits, is required on both dates: Abbey National Building Society v Cann (1991) 1 AC 56.
47. Williams & Glyn's Bank Ltd v Boland (1981) AC 487.
48. See, for example, Thompson (1994) Conv 140.
49. See the discussion at notes 36 and 37 and associated text, above.
50. The position closely resembles that in City of London Building Society v Flegg (1988) AC54.
51. City of London Building Society v Flegg, above.
52. O'Hagan ‘A Specially Protected Class?’ (1994) 144 NLJ 765.
53. Section 205(1)(ii), Law of property Act 1925.
54. There are two further, subsidiary, arguments against overreaching: (1) it is difficult to see that the wife's equity is by its nature overreachable; (2) the wife's equity does not arise under the trust for sale but is external to that trust (this latter objection could perhaps be met by an ad hoc trust for sale under s 2(2), Law of property Act 1925). It is submitted that the argument in the text is a more satisfactory answer to O'Hagan than that suggested by Dr Roger Sexton in his letter at (1994) 144 NLJ 820. Sexton's argument is that Mrs O'Brien's right to set aside the mortgage is a right in personam, not a right against land. That argument is insufficient, since it fails to explain how the wife's right against her husband can, as a right in personam, be exercised against the bank, the fundamental distinction between personal and proprietary rights (see National Provincial Bank Ltd v Ainsworrh (1965) AC 1175) needs to be observed.
55. Note 12 and associated text, above.
56. See the note on O'Brien by Lehane at (1994) 110 LQR 167 at 171.
57. An assignee of the personal guarantee, even a legal assignee taking for value and without notice, would be in no better position than the assignor, since an assignee takes subject to equities, including an equity of rescission: see, for example, Graham v Johnson (1869) LR 8 Eq 36; s 136(1), Law of Property Act 1925.
