CIBC Mortgages plc v Pitt [1993] UKHL 7 (21 October 1993)

Mrs Pitt was induced by her husband's actual undue influence to charge their jointly-owned home to secure a loan ostensibly for a holiday home, but actually used by Mr Pitt for share speculation. The House of Lords held that manifest disadvantage need not be proved in cases of actual undue influence, but dismissed the appeal as the lender had no notice of the husband's wrongdoing.

Facts

Mr and Mrs Pitt jointly owned their matrimonial home at 26 Alexander Avenue, valued at £270,000 in 1986. Mr Pitt wished to borrow money secured on the property to buy shares. Mrs Pitt was reluctant but agreed after Mr Pitt exerted pressure upon her, which the trial judge found constituted actual undue influence. A loan application was submitted to CIBC Mortgages plc stating the purpose was to purchase a holiday home. Mrs Pitt signed the application, mortgage offer, and legal charge without reading them and received no independent advice. The loan of £150,000 was advanced jointly to both spouses, the existing mortgage was discharged, and the balance paid into their joint account. Mr Pitt used the funds to purchase shares in his own name, later using them as collateral for further borrowing. Following the 1987 stock market crash, Mr Pitt fell into arrears and CIBC sought possession.

Mrs Pitt’s Defence

Mrs Pitt claimed the legal charge should be set aside on grounds that she was induced to execute it by her husband’s misrepresentation and undue influence, and that the plaintiff should be bound by Mr Pitt’s wrongdoing.

Issues

1. Whether a claimant alleging actual undue influence (Class 1) must prove the transaction was manifestly disadvantageous, as required in cases of presumed undue influence (Class 2).

2. Whether the plaintiff lender was affected by Mr Pitt’s undue influence such that Mrs Pitt could set aside the charge against the lender.

Judgment

Manifest Disadvantage

Lord Browne-Wilkinson, delivering the leading speech, held that the requirement to prove manifest disadvantage established in National Westminster Bank Plc v Morgan [1985] AC 686 applied only to cases of presumed undue influence (Class 2), not to cases of actual undue influence (Class 1). The Court of Appeal’s decision in Bank of Credit and Commerce International S.A. v Aboody [1990] 1 QB 923, which extended the manifest disadvantage requirement to actual undue influence cases, was disapproved.

Lord Browne-Wilkinson stated that actual undue influence is a species of fraud, and a person induced by it to enter a transaction is entitled to have it set aside as of right. He held that a claimant who proves actual undue influence is not under the further burden of proving manifest disadvantage.

Notice and Effect on the Lender

Although Mrs Pitt established actual undue influence by Mr Pitt, to set aside the charge against the plaintiff lender, she needed to show either that Mr Pitt acted as agent for the plaintiff or that the plaintiff had actual or constructive notice of the undue influence. The trial judge found Mr Pitt was not the plaintiff’s agent, and the plaintiff had no actual notice.

On constructive notice, Lord Browne-Wilkinson agreed with the Court of Appeal that the plaintiff had no reason to be put on inquiry. The transaction appeared to be a normal joint advance to husband and wife for their joint benefit. The loan was made jointly, the stated purpose was remortgaging and purchasing a holiday home, and the cheque was payable to both spouses jointly.

Lord Browne-Wilkinson rejected the argument that the mere possibility of undue influence in any husband-wife transaction was sufficient to put a lender on inquiry. He distinguished surety cases, where a wife guarantees her husband’s debts without apparent financial benefit to herself, which combination of factors puts a creditor on inquiry. In joint loan cases with no such warning signs, requiring lenders to investigate would make such transactions almost impossible and would not benefit married couples.

Implications

This case established that proof of manifest disadvantage is not required where actual undue influence is proved, distinguishing it from cases of presumed undue influence. It also clarified that in joint loan transactions appearing to benefit both spouses, lenders are not fixed with constructive notice of potential undue influence merely because the borrowers are married. The decision distinguished surety cases where a wife charges her property for her husband’s sole benefit, which do put lenders on inquiry. The case was decided alongside Barclays Bank Plc v O’Brien, and together they established important principles regarding undue influence and third-party lenders.

Verdict: Appeal dismissed. The legal charge in favour of CIBC Mortgages plc was upheld and enforceable against Mrs Pitt. Although Mr Pitt had exercised actual undue influence over Mrs Pitt, the plaintiff lender was not affected by that wrongdoing as it had neither actual nor constructive notice of the undue influence, and the transaction appeared to be a normal joint advance for the joint benefit of husband and wife.

Source: CIBC Mortgages plc v Pitt [1993] UKHL 7 (21 October 1993)