On October 11 2001, the House of Lords handed down judgment on eight appeals relating to claims by banks for possession of marital homes under mortgage. In each case the security was granted by a wife to secure her husband's debts. The wives were claiming that the security was unenforceable because they had signed under the undue influence of their husbands.
The House of Lords took the opportunity to reconsider previous guidelines set out in the well-known case of Barclays Bank plc v O'Brien. Although the substance of the law set out in that case has not changed significantly, the practical steps a bank needs to take in order to ensure that its security is enforceable have now become considerably more onerous than before.
Each of the cases which was considered in this decision of the House of Lords concerned a wife who had given security for her husband's debts. In this article, for convenience, we refer to the debtor as the "husband" and the surety as the "wife". However, the principles extend to all situations where the person who grants the security is in a non-commercial relationship with the debtor. This includes all couples, whether married or unmarried, heterosexual or homosexual, and other family relationships.
The principle, which was set out in Barclays Bank plc v O'Brien and affirmed in Royal Bank of Scotland plc v Etridge is that, in such circumstances, there may be an issue of undue influence. The relationship between the debtor and the surety is such that the surety may try to claim, on attempted enforcement, that she was subjected to her husband's undue influence when granting the security. The bank should have been put on inquiry when taking the security that there was a risk of undue influence, and should have taken reasonable steps to satisfy itself that the wife's agreement to stand surety has been properly obtained. If the bank cannot show that it took reasonable steps, then the security cannot be enforced.
Since the decision in Barclays Bank v O'Brien, the normal practice has been for the bank to seek a certificate from a solicitor that the wife was independently advised of the risks she was taking when granting the security. The House of Lords in Royal Bank of Scotland plc v Etridge has now held that, for the future, this will not be sufficient.
The new guidelines require a number of steps to be taken, including in particular direct communication between the bank and the wife. The bank must inform the wife directly of the fact that the legal advice is needed as a protection to the bank to enable it to enforce the security against her in the future. The bank is also under a duty to ensure that financial disclosure about the husband's liabilities is made to the solicitor advising the wife. A number of further steps were set out in the judgment as requirements.
The practical consequences of this decision are immense, because bank lenders now need to set up internal procedures to ensure that these new, more onerous, guidelines are followed in each case where these principles of law may be an issue. Legal advice should be taken as to the procedures to be set up in order to establish that, where security is taken in such circumstances, such security is enforceable.