Prescriptions for Banks and Solicitors in Bank vs Surety Wife Cases

An analysis of Royal Bank of Scotland v Etridge (AP) [2001] UKHL 44

This article will highlight the salient features of the almost 100-page long decision of the House of Lords on the question of when a bank is put on notice in surety transactions. The article also focuses on how the undue influence defence, typically raised in such surety transactions, may be avoided in the future.

The House of Lords in the landmark decision of Royal Bank of Scotland v Etridge (AP) [2001] UKHL 44 has provided guidance as to when a bank will be put on notice, that a surety's (usually the wife) relationship with a debtor (usually the husband) gives rise to a heightened risk of undue influence, and the steps to be taken in the future by the bank and solicitors in these circumstances.

The Etridge Decision
Eight appeals were heard together before the House of Lords. In seven of them, the appellant was a wife who agreed to subject her property, usually her interest in the matrimonial home, to a charge in favour of a bank in order to provide security for payment of her husband's debts or the debts of a company in which her husband carried on business. In each case, the bank commenced proceedings for possession of the mortgaged property with a view to its sale and the wife defended the claim by alleging that: (a) her agreement to grant the charge was brought about by undue influence or misrepresentation, or both, on the part of her husband; and (b) in the circumstances, the chargee bank ought not to be allowed to enforce the charge against her. The question arose as to whether the bank should be treated as having had notice of the impropriety or alleged impropriety of the husband. The bank had some reason to believe that a solicitor had acted for the wife in the transaction and thus the question also arose as to the extent to which the solicitor's participation or believed participation, had absolved the bank of the need to make any further inquiries about the circumstances in which the wife was persuaded to agree to grant the charge or to take further steps to satisfy itself that her consent to do so was true and informed.

The eighth appeal was a case in which the wife was suing a solicitor for damages who advised her before she entered into a guarantee obligation in similar circumstances to the other appeals.

When is the Bank Put on Inquiry?
In Royal Bank of Scotland plc v Etridge (No 2) [1998] 4 All ER 705, the Court of Appeal held that it was necessary to prove in each case, before a bank was put on inquiry, that the transaction was on its face not to the financial advantage of the wife and that there was a substantial risk that, in procuring the wife to act as surety, the husband had committed a legal or equitable wrong that entitled the wife to set aside the transaction. The House of Lords in Etridge stated that the Court of Appeal had erred and held instead that a bank is simply put on inquiry whenever a wife offers to act as surety for her husband's debts. The position is likewise if the husband acts as surety for his wife's debts or in the case of unmarried couples - whether heterosexual or homosexual - where the bank is aware of the relationship. The bank is also put on inquiry where the wife acts as surety for the debts of a company whose shares are held by her husband and her, even when the wife is a director or secretary of the company.

In fact, the House of Lords went much further to lay down the principle, after a review of Barclays Bank plc v O'Brien [1993] 4 All ER 417 and Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144, that a bank will be put on inquiry in every case where the relationship between the surety and debtor is non-commercial. In its opinion, there could not be a rational cut-off point with certain types of relationships being susceptible to an increased risk of undue influence and others not. This principle, the House of Lords held, was simple, coherent and eminently desirable and did not go beyond the reasonable requirements of present times. It would prove a modest burden for banks and other lenders which is no more than what is reasonably to be expected of a creditor who is taking a guarantee from an individual. Banks and other creditors should, therefore, regulate their affairs in the future accordingly.

What Must the Bank Do Once it is Put on Inquiry?
The bank's responsibilities as previously set out in the seminal decision of Barclays Bank v O'Brien [1997] 1 AC 180 have been significantly widened. The House of Lords held that once a bank is put on inquiry, it has an obligation to take reasonable steps to satisfy itself that the practical implications of the proposed transaction have been brought home to the wife.

Whilst it is open to the banks to give advice to the wife directly, ordinarily, it would be reasonable for a bank to rely upon confirmation from a solicitor, acting for the wife, that he had advised the wife appropriately. However, the position is different if the bank knew that the solicitor had not advised the wife or if the bank knew facts from which it ought to have realised that the wife had not received the appropriate advice. In such situations, the bank would proceed at its own risk.

Most importantly, the House of Lords held that in future where the bank is put on inquiry and for its protection, the bank should take the following steps to ensure that the wife has been independently advised by a solicitor:

• At the start of the proposed transaction, the bank should communicate directly with the wife, requesting that she nominate a solicitor to act independently for her. The bank should inform her that for its own protection it would require written confirmation from the solicitor that he fully explained to her the nature of the documents and its practical implications. She should be told that the purpose of that requirement is to preclude her from disputing that she was legally bound by the documents once she has signed them. She should be informed that the solicitor might be the same solicitor as the one acting for her husband in the transaction, unless she states otherwise. The bank should not proceed with the transaction until it has received an appropriate response directly from the wife.
• The bank should provide the solicitor with the financial information he needs to properly advise the wife. What information will be required will depend on the facts of the case. Ordinarily, that would include information on the purpose of the proposed new facility, the extent of the husband's indebtedness and the amount and terms of any new facility. If the bank's request for security arose as a result of a written application by the husband for a facility, a copy of the application should be sent to the solicitor. The bank, in this case, will need to obtain the consent of the husband to that circulation of confidential information and if it is not forthcoming, the transaction will not be able to proceed.
• Where the bank believes or suspects that the wife has been misled by her husband or is not entering into the transaction of her own free will, the bank has to inform the wife's solicitor of the facts which gave rise to its belief or suspicion.
• The bank shall in every case obtain from the wife's solicitor, a written confirmation to the effect mentioned above.

Some observations may be made at this point. The procedures previously adopted by the banks may not afford them adequate protection in the wake of Etridge. It is also simply not the solicitor's duty to obtain financial disclosure, the onus being on the bank to provide the wife's solicitor with the relevant financial information and to notify him of any suspicions that the wife might have been misled. It is, therefore, foreseeable that these areas will be contested in court if the bank gets this wrong. Under the circumstances, it is important for the bank to establish adequate measures and procedures to ensure that all the correct information is sent to the wife's solicitor and a record of what has been sent is maintained.

What Must a Solicitor, Who is Advising the Surety Wife, Do?
The House of Lords held that as a general proposition, the scope of a solicitor's duties was dictated by the terms, whether express or implied, of his retainer. As a first step, the solicitor will need to explain to the wife the purpose for which he is involved. He should explain that, should it ever become necessary, the bank will 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 will then need to obtain confirmation from the wife that she wishes for him to act for her in the matter and advise her on the legal and practical implications of the proposed transaction. The typical advice a solicitor will be expected to give should, as a core minimum, cover the following matters:

• The solicitor will need to explain the nature of the documents and its practical consequences if she signs them, that is she could lose her home if her husband's business fails and that she could be made bankrupt.
• The solicitor will need to point out the seriousness of the risks involved. The wife should be told the purpose of the proposed new facility, its amount and principal terms and that the bank may increase the amount of the facility, change its terms or grant a new facility, without reference to her. She should also be told the amount of her liability. The solicitor should discuss the wife's financial means, including her understanding of the value of the property being charged. The solicitor should also discuss whether the wife or her husband had any other assets out of which repayment could be made if the husband's business should fail.
• The solicitor will need to clearly state that the wife had a choice and that the decision she made was hers alone in light of the proposed facility and the current indebtedness of her husband. She need not agree to the transaction.
• The solicitor should check whether the wife wishes to proceed. She should be asked whether she consented to the solicitor's written confirmation to the bank that he had explained to her the nature of the documents and the practical implications it might 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 would 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, and should be couched in suitably non-technical language. The solicitor should obtain from the bank any information he needs. If the bank fails, for any reason, to provide information requested, the solicitor should decline to provide the confirmation sought by the banks.

Further observations on the obligation of solicitors may also be made. By implication, the 'core minimum' standards applicable to solicitors should also provide the standards to be observed by a bank that has decided to take on the role of advising the wife.

Evidently, the scope of a solicitor's duties in advising a wife in such transactions has also been dramatically reduced since the Court of Appeal decision in Etridge (supra). There the Court of Appeal held that solicitors had to satisfy the court that the husband had not brought undue influence to bear on the wife's decision. This itself involved investigations into issues such as the financial state of the business and the state of the marriage. With the House of Lords' decision in Etridge, the solicitor's role is reduced to ensuring that the wife understands the nature and effect of the transaction. Practically, this should provide a sigh of relief to solicitors, especially those specialising in conveyancing and mortgages who are unlikely experts in company finance or psychology. Had the House of Lords not overturned the decision of the Court of Appeal, many solicitors would have been weary of handling these commonplace transactions with their correspondingly onerous obligations.

Does the Wife's Solicitor Have to Act for Her Alone or May He Act for the Husband or Bank as Well?
The House of Lords also dealt with this novel point and held that the solicitor advising the wife does not need to act for the wife alone, provided he is satisfied that that is in the wife's best interests and it will not give rise to any conflicts of duty or interest. Further, when accepting instructions to advise the wife, the solicitor assumes responsibilities directly to her, both at law and professionally. These duties are owed to the wife alone and, in advising the wife, the solicitor is acting for the wife alone. If at any stage the solicitor becomes concerned that there is a real risk that other interests or duties might inhibit his advice to the wife, he should cease acting for her.

The implications of Etridge will mean that in connection with these transactions, there need not be a host of solicitors each advising the bank, husband and wife. What is perhaps more important, is that both the solicitor (regardless of who he acts for) and bank work in tandem to ensure that not only are the wife's interests protected but that the bank may enforce its security without problems. This itself necessitates a proper understanding and application of the Etridge prescriptions to all relevant transactions.

Conclusion
Therefore, the challenge in such cases is for the law to strike a balance and afford both parties to the transaction a measure of protection: wives need to be protected against the risk of entering into transactions they do not understand and banks need to be able to advance money in reasonable certainty that the security obtained will be enforceable. In this sense, the detailed guidance proffered by the House of Lords will have lasting practical implications for banks and solicitors, who offer advice in these surety transactions, and all those who seek to set aside secured transactions on the basis of undue influence. If adopted, the guidelines will enable the bank to feel reasonably secure that its loan will be enforceable and, in the alternative (albeit unfortunately for solicitors), provide the bank with the means to shift its loss in the unenforceable security to the solicitor in negligence if things go awry. Clearly, in the event that the steps advocated by the House of Lords are followed in the future, it will be difficult for a wife to maintain the defence of undue influence because reasonable steps upon which the bank will be able to rely on will have been shown, regardless of the strength of any claim of undue influence.

Whilst the English decision in Etridge is not strictly binding on Singapore courts, it is important to remember that the House of Lord's decision will remain highly persuasive locally, especially since none of the local cases have provided any in-depth analysis into the obligations of banks and solicitors in these circumstances. Until our courts have had the opportunity to grapple with its minutiae, it will therefore be advisable and prudent for those involved in advising on these transactions to draw up their own internal guidelines as to how they should proceed, taking into account the clear prescriptions provided for in the House of Lords' judgment.

Nicholas Fernandez
Rajah & Tann