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

A husband pressured his wife to remortgage their home for his stock market speculation. The loan application falsely stated the funds were for a holiday home. The House of Lords held the mortgage was enforceable as the bank had no notice of the husband's undue influence.

Facts

Mr and Mrs Pitt were joint owners of their matrimonial home. Mr Pitt, wishing to speculate on the stock market, pressured his wife into agreeing to a remortgage of the property for £150,000 with the plaintiff, CIBC Mortgages plc. The loan application, prepared by Mr Pitt, falsely stated that the purpose of the loan was to purchase a holiday property and pay off the existing mortgage. Mrs Pitt did not read the documents and signed them under pressure from her husband, amounting to actual undue influence. CIBC, unaware of the true purpose of the loan or the pressure exerted on Mrs Pitt, advanced the money. The money was subsequently lost in the stock market crash of 1987, and the couple fell into arrears. CIBC brought proceedings seeking possession of the home.

Issues

The primary legal issue was whether the mortgage could be set aside as against the wife due to the husband’s undue influence. This turned on a crucial second question: was the bank (CIBC) fixed with constructive notice of the husband’s wrongdoing? Specifically, was there anything in the circumstances of the transaction that should have put the bank on inquiry that the wife’s consent may have been improperly obtained?

Judgment

The House of Lords unanimously allowed the appeal by CIBC, restoring the trial judge’s order for possession. The leading judgment was delivered by Lord Browne-Wilkinson.

Actual Undue Influence and Notice

Lord Browne-Wilkinson accepted the trial judge’s finding that Mr Pitt had exercised actual undue influence over Mrs Pitt. He held that a party who has been induced to enter into a transaction by the undue influence of another is entitled to set that transaction aside as against the wrongdoer. However, for the transaction to be set aside against a third party (the bank), it must be shown that the third party had actual or constructive notice of the undue influence.

The Crucial Distinction from O’Brien

This case was heard together with Barclays Bank Plc v O’Brien. Lord Browne-Wilkinson drew a critical distinction between the two. In O’Brien, the wife was acting as a surety for her husband’s business debts, a transaction which on its face was not to her financial advantage. This fact was sufficient to put the bank on inquiry. In contrast, in the present case, the transaction appeared to be for the joint benefit of both Mr and Mrs Pitt. He stated:

In the present case, the stated purpose of the loan was to purchase a holiday home for the joint benefit of both Mr. and Mrs. Pitt. The transaction was, on its face, for the benefit of them both. The bank was not put on inquiry and is not fixed with constructive notice of the undue influence exercised by Mr. Pitt over Mrs. Pitt.

Misrepresentation

Lord Browne-Wilkinson also held that Mrs Pitt could not rely on her husband’s misrepresentation about the purpose of the loan to defeat the bank’s claim. A principal is only affected by the misrepresentation of an agent. In this case, Mr Pitt was not acting as the agent of the bank when he made the misrepresentation to his wife. Therefore, the bank’s rights were not affected by it.

Implications

The decision in CIBC v Pitt is a landmark case that clarifies the doctrine of constructive notice in the context of undue influence. It established a clear dividing line: a lender is only put on inquiry about the risk of undue influence where a transaction is, on its face, disadvantageous to one of the joint borrowers (e.g., securing the other’s personal debts). Where a loan is ostensibly for the joint benefit of both parties, the lender is not required to make further inquiries, even if undue influence has in fact occurred. This provided lenders with greater certainty but also highlighted the vulnerability of a spouse in a joint loan situation where the stated purpose of the loan is a fiction. The case, read alongside O’Brien, was instrumental in shaping the legal framework that eventually led to the protective steps outlined in Royal Bank of Scotland plc v Etridge (No 2).

Verdict: The appeal was allowed, and the order of the trial judge for possession in favour of the bank was restored.

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