Royal Bank of Scotland v Etridge
25 June 2001
18 November 2013
21 May 2014
29 November 2013
10 September 2014
27 November 2013
Mr and Mrs Middle-England jointly own their matrimonial home. His mobile phone business requires more capital to buy larger premises. He asks the bank to lend against a second mortgage on the home. Following Barclays Bank v O'Brien (1994), the bank requires Mrs Middle-England to take independent legal advice before signing the second charge. So she goes to see her husband's solicitor Mr Widdecombe. In fact, Mr Middle-England has persuaded his wife to sign by misrepresentation or undue influence. What is Mr Widdecombe's duty to her? If she signs and the business fails, can the bank rely on the second charge against the wife? If it can, can the wife sue the solicitor?
In 1998 the Court of Appeal heard argument in eight conjoined appeals and provided a helpful synthesis of the principles (Royal Bank of Scotland v Etridge (no 2)). It held that, in general, so long as the bank had confirmation from a solicitor that the solicitor had advised the wife in relation to the charge, the bank could rely on the charge against the wife. This applied even if the husband had exercised undue influence over the wife. The only exception was loans on outrageously extortionate terms: here the bank would lose even if the wife had a solicitor.
So Etridge improved the position of banks against wives, but it also improved the position of wives against solicitors. The court held that it was not enough for the solicitor to ensure that the wife understood the nature and effect of the transaction and wished to carry it out. The solicitor also had to be satisfied that the transaction was one into which the wife could sensibly be advised to enter. Solicitors normally have to inform themselves of the amount of existing indebtedness and of the new advance, the reasons for the new advance and sometimes even of the stability of the marriage. If the transaction was not one into which the wife could sensibly be advised to enter, the solicitor had to advise her not to enter it or to renegotiate its terms.
The result of this approach was to shift the duty of protecting the wife from the bank to the solicitor and the solicitor's insurers.
But there was one ray of light for solicitors. We know what would happen if the solicitor breached these duties, but one has to ask what would have happened had they complied with them. The court pointed out that if the marriage was secure and the business provided the income on which the family depended, then even if fully advised the wife would probably have signed. Many subsequent claims by wives against solicitors have failed on causation: even if the solicitor had complied with Etridge, the wife would still have signed, so the solicitor's breach caused the wife no loss.
In the House of Lords, the Law Society has rightly been permitted to intervene, represented by Jonathan Sumption QC of Brick Court Chambers. He says that it is wholly unrealistic to expect solicitors in these cases to advise on the finances of small businesses. The bank, not the solicitor, should be required to ensure that the wife sees an accountant. Otherwise the floodgates will open.
But the decision in Etridge was three years ago. The number of successful claims is probably not enormous. Admittedly, it is difficult to see how the solicitor should "sensitively probe" the stability of the marriage, unless trained in psycho-sexual therapy. As to the rest of the Etridge duties, solicitors are free either to decline to act or to charge higher fees for this time-consuming work. But the dilemma for the House of Lords is that the Law Society has stated that, if these duties remain, it may advise solicitors that they cannot properly hold themselves out as being able to perform this kind of work at all. So the burden of advising wives might be back with the banks, even if the Law Society loses in the Lords.
William Flenley is a barrister at 4 Paper Buildings and is co-author of Solicitors' Negligence and an editor of Cordery on Solicitors