Royal Bank of Scotland v. Etridge (AP) [2001] UKHL 44 (11 October 2001)

In eight conjoined appeals, wives mortgaged their homes to secure husbands' business debts. The House of Lords clarified the doctrine of undue influence and set out practical steps a bank must take to ensure the wife's consent is properly obtained.

Facts

The case comprised eight conjoined appeals, each involving a similar factual pattern. A wife charged her interest in her home, often the matrimonial home held in joint names, as security for a loan or overdraft facility provided by a bank to her husband or a company through which he operated his business. The businesses later failed, and the bank sought to enforce its security by seeking possession of the property. In each case, the wife raised the defence that her signature on the charge was procured by the undue influence of her husband. She argued that the bank had constructive notice of this undue influence, and therefore the security should be unenforceable.

Issues

The primary legal issue before the House of Lords was to clarify the circumstances in which a bank is ‘put on inquiry’ that a wife’s consent to stand as surety for her husband’s debts may have been procured by undue influence. The court also sought to delineate the precise steps a bank must take to protect itself from a subsequent claim that the security is voidable. The case required the court to balance the need to protect vulnerable spouses from exploitation against the commercial need for banks to be able to rely on the security they take for business lending, which is vital for the economy.

Judgment

The leading speech was delivered by Lord Nicholls of Birkenhead, with whom the other Law Lords agreed. He set out a comprehensive framework for cases of undue influence in the context of sureties.

The Doctrine of Undue Influence

Lord Nicholls clarified the nature of presumed undue influence. He moved away from the rigid ‘Class 2A’ (relationships automatically presumed to be of influence) and ‘Class 2B’ (relationships where influence must be factually proven) categorisation. Instead, he stated that a presumption of undue influence arises where there is:

1. A relationship of trust and confidence between the parties.
2. A transaction that ‘calls for explanation’. A transaction calls for explanation if it is not readily explicable by the relationship between the parties.

While the husband-wife relationship is not one where a presumption of influence automatically arises, the specific facts can readily establish a relationship of trust and confidence. A transaction where a wife guarantees her husband’s business debts is not, in itself, one that calls for explanation, but it can be in combination with other factors.

The Bank’s Position: Being ‘Put on Inquiry’

Lord Nicholls held that a bank is put on inquiry whenever a wife offers to stand as surety for her husband’s debts. This rule also applies to unmarried couples in a relationship, whether heterosexual or homosexual, where the bank is aware of the relationship. The creditor is always put on inquiry in any non-commercial case where the relationship between the surety and the debtor is non-commercial.

Steps the Bank Must Take

To avoid being fixed with constructive notice of any undue influence, the bank must take reasonable steps to satisfy itself that the surety has had brought home to her, in a meaningful way, the practical implications of the proposed transaction. Lord Nicholls outlined a clear protocol for the bank and the advising solicitor. The ordinary steps include:

…insisting that the wife attend a private meeting with a representative of the bank at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice.

However, Lord Nicholls recognised that for practical reasons, banks would prefer to rely on confirmation from a solicitor that proper advice has been given. The definitive protocol he established involves:

1. The bank communicating directly with the wife, informing her that it requires a solicitor, acting for her, to confirm in writing that she has been advised on the nature and implications of the transaction.
2. The bank providing the solicitor with the necessary financial information regarding the husband’s indebtedness for the advice to be meaningful.
3. If the wife nominates a solicitor, the bank should not proceed until it has received the appropriate written confirmation from that solicitor.

The solicitor’s role is to explain the transaction and its risks to the wife, ensuring she understands she has a choice. The bank is entitled to rely on the solicitor’s confirmation and is not responsible for the quality of the advice given, unless it knows or ought to know the advice was deficient.

Implications

The judgment in Etridge is of profound importance as it provides a clear and practical set of guidelines (the ‘Etridge protocol’) for financial institutions. By following these steps, banks can obtain a degree of certainty that their security will be enforceable against a surety. This balances the protection of potentially vulnerable individuals with the commercial reality of lending. The decision standardises practice across the lending industry and clarifies the respective duties of banks and solicitors in such transactions. It aimed to reduce litigation by making the law clearer and the required procedural steps explicit for all parties.

Verdict: The House of Lords applied the newly clarified principles to the eight conjoined appeals, allowing some appeals and dismissing others based on their specific facts. The appeal of Mrs Etridge herself was dismissed.

Source: Royal Bank of Scotland v. Etridge (AP) [2001] UKHL 44 (11 October 2001)