6 August 2001
The Court of Appeal held in Barclays Bank Goff that the bank had done enough by requiring a solicitor to advise the wife, following its 1998 decision in Etridge. In National Westminster Bank Leggatt (19 October 2000) the Court of Appeal held that where a wife stood surety for her husband's debts, the creditor was put on enquiry as to the advantage to the wife in giving the security. If, on its face, the transaction was not to her advantage, then the creditor had constructive notice of her rights. In Woods Scotlife House Loans (No 2) (13 December 2000), Mr Justice Lloyd held that the question on constructive notice was whether, in the light of all of the information available to the bank, including the availability of legal advice, there was still a risk of undue influence. In National Westminster Bank Breeds (1 February 2001), Mr Justice Collins held that the availability of legal advice was not enough, because the wife's solicitor had serious conflicts of interest, and the bank should have realised this.
The legal landscape in this area may well undergo fundamental change as a result of the decision of the House of Lords in Etridge, which is expected very soon. Undue influence has spawned more commercial uncertainty and litigation for banks in the last 20 years than any other topic. It now remains to be seen whether the House of Lords can provide a comprehensive answer to some of the very difficult issues which arise, and how it will deal with its earlier decisions in National Westminster Bank Morgan in 1985 and Barclays Bank O'Brien in 1994.
Will the lords decide that manifest disadvantage is a necessary requirement for the doctrine of undue influence to be invoked? Will they put the doctrine on a new conceptual basis and explain its rationale and limits? Will they lay down general guidelines as to when the availability of independent legal advice negates undue influence? Will they state a set of rules which, when complied with, will mean that security can safely be taken?
There is a fundamental difficulty underlying the doctrine. If it is treated as a flexible equitable doctrine used to do justice in the particular case then it may achieve that end in cases decided by the courts, but at the price of commercial uncertainty on the taking of security. If, on the other hand, undue influence is explained as a set of rules to be followed for security to be unimpeachable, then this will produce commercial certainty for lenders, but at the price of injustice in particular cases where the rules are followed and the transaction is actually flawed. Will the House of Lords square this circle? It may be that any attempt to reduce a doctrine of equity to a set of rules is bound to fail. The price of protection against undue influence for the individual may be that those taking security cannot rely merely on compliance with a set of procedures, but will always need to exercise discretion and caution in dealing with transactions involving wives and sureties.
Duties of care
Banks owe a duty to take a reasonable degree of care in the operation of their businesses. The traditional boundaries of such business have been swept away over the last 20 years, with the result, for example, that where banks undertake other business, such as the sale of insurance, they are liable to exercise the degree of care required of insurance brokers.
In Frost James Finlay Bank (25 June 2001), the bank provided a remortgage and the claimant reasonably believed it to be a condition of the facility that she had to change the identity of her insurers. The bank had at the time a structural report on the property identifying serious defects. The change of insurers was a bad mistake for the claimant because of the known and existing defects identified in the report. It was held by Mr Justice Hart that there was no Chinese wall in the bank between information it had as a lender and as a broker. The bank, by selling insurance, had taken on the role of a broker and was bound to give careful advice. This illustrates the difficulties for banks taking on the provision of insurance broking services.
In Citibank Ercole (24 May 2001), the defendants had bought works of art as recommended by the claimant under a secured loan facility. The works of art did not appreciate in value and at the end of the term had to be sold, leaving an outstanding loss. Mr Justice Bell held that the bank was entitled to sell, applying Cuckmere Brick Co Mutual Finance (1971). The counterclaim in negligence was rejected on the facts, because the bank had not advised at the outset on the value of the works of art. If the bank, through its agent, had given such advice on the future value of the works of art, then it could have been liable.
In Meftah Lloyds TSB Bank (22 March 2001), Judge Collins held that, even though a mortgagee is entitled to sell when they wish, they cannot ignore the fact that a short delay may lead to a much higher price in a particular case. The bank and receivers must fairly and properly expose the property in the market to avoid possible liability.
Hedley Byrne (1964) is the most famous case concerning credit references. The principle has been applied over the years in a vast range of circumstances, but there have been few credit reference cases. In Turner Royal Bank of Scotland (23 January 2001), it was claimed that: (i) the giving of a credit reference without consent is a breach of confidence; (ii) the reference given had been negligent; and (iii) there was a conspiracy between a number of banks to pass information to credit reference agencies. The first claim succeeded. This may mean that some banks will need to change their procedures and obtain written consent to the giving of references. Customers would be well advised to agree because a refusal by a bank to give a reference is likely to be more damaging even than a qualified reference. The Court of Appeal assumed that there had been a duty of care in respect of the reference given, but held that the claimant had, in fact, suffered no loss from such a breach.
Perhaps the most interesting question is whether the practice under which banks give information on debt defaulters to credit reference agencies is justified. The judge held that it was on the basis of a duty to the public. Is there an exception to the bank's duty of confidence under Tournier justifying banks giving lists of small debt defaulters to credit reference
agencies? The Court of Appeal did not grant permission to appeal on this point and it remains to be seen whether in some other case in the Court of Appeal, an attack will be made on this aspect of banking practice.
Section 127 Insolvency Act 1986
In Hollicourt (Contracts) Bank of Ireland (2001), the bank missed the advertisement of a petition to wind up the company and allowed the account to be operated for some three months. The liquidator made proprietary claims against the bank in respect of all payments out. This was rejected by the Court of Appeal, which held that Section 127 applied as against the payees of the cheques paid out from the company's account. The policy underlying the section was not to impose proprietary remedies against banks. The statutory purpose was accomplished if liability was imposed upon the ultimate recipient of the company's property. This case settles what had been a moot point and provides some comfort to banks which miss the fact of the advertisement of a petition.