The House of Lords unanimously dismissed the bank's appeal against the Court of Appeal's decision (1993) QB 109 that Mrs O'Brien was entitled to set aside the legal charge on the matrimonial home securing her husband's liability to the bank.
Mr O'Brien wished to increase the overdraft facility available to a company in which he had an interest to pounds 135,000 and offered the matrimonial home, which was in his and his wife's joint names, as security. Mr and Mrs O' Brien executed the legal charge on the house at the bank.
Mrs O'Brien was given no explanation of the effect of the documents. She signed the legal charge without reading the documents. Mr O'Brien had told her the charge was to secure only pounds 60,000 and would be released in a short time. The company's indebtedness grew and the bank sought to enforce its charge.
John Jarvis QC, William Blair and Ross Cranston (Lovell White Durrant) for the bank; Simon Buckhaven and Bernard Devlin (Cathcart & Co) for Mrs O'Brien.
LORD BROWNE-WILKINSON said that the law in surety cases where the wife wished to set aside the transaction, not against the wrongdoing husband but against the creditor bank, had developed in an artificial way and should be restated in a form which was principled.
There was no basis in principle for affording special protection to a limited class in relation to one type of transaction. The key was to identify the circumstances in which the creditor would be taken to have had notice of the wife's equity to set aside the transaction.
Where a wife had agreed to stand surety for her husband's debts as a result of undue influence or misrepresentation, the creditor would take subject to the wife's equity to set aside the transaction if the circumstances were such as to put the creditor on inquiry as to the circumstances in which she agreed to stand surety.
A creditor was put on inquiry when a wife offered to stand surety for her husband's debts by the combination of two factors: (a) the transaction was on its face not to her financial advantage; and (b) there was substantial risk in transactions of that kind 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.
Unless the creditor who was put on inquiry took reasonable steps to satisfy himself that the wife's agreement to stand surety had been properly obtained, the creditor would have constructive notice of the wife's rights.
The creditor would have taken reasonable steps if it insisted that the wife attend a private meeting, in the absence of the husband, with a representative of the creditor at which she was told of the extent of her liability as surety, warned of the risk she was running and urged to take independent legal advice. A personal interview was essential because written warnings were often not read and were sometimes intercepted by the husband.
The law would then hold the balance fairly between, on the one hand, the vulnerability of the wife who relied 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.
The same principles were applicable where there was an emotional relationship between co-habitees and other relationships where the creditor was aware that the surety reposed trust and confidence in the principal debtor.
Therefore where one co-habitee had entered into an obligation to stand as surety for the debts of the other co-habitee and the creditor was aware that they were co- habitees:
(1) The surety obligation would 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 had been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the creditor had taken reasonable steps to satisfy himself that the surety had entered into the obligation freely and in knowledge of the true facts, the creditor would be unable to enforce the surety obligation because he would be fixed with constructive notice of the surety's right to set aside the transaction.
(3) Unless there were special exceptional circumstances, a creditor would have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warned the surety, at a meeting not attended by the principal debtor, of the amount of the potential liability and of the risks involved and advised the surety to take independent legal advice.
Applying those principles to the case, the bank, having failed to take reasonable steps, was fixed with constructive notice of the wrongful misrepresentation made by Mr O'Brien to Mrs O'Brien. Mrs O'Brien was therefore entitled to set aside the legal charge on the matrimonial home.Reuse content