Banks have been commonly subject to cases such as this one, where the house is offered as a security for the husband’s business debt and the wife is the surety. Thus, now common law imposes many procedural duties on banks that must be followed. Before clarifying those duties, the claims of the plaintiff for an invalid contract must be addressed.
The issue arises firstly on whether the plaintiff was misrepresented in signing the contract, and if the answer were affirmative, this would make the agreement voidable. Misrepresentation in this case seems to fall in the category of fraudulent; as Mr. George was intentionally lying to his wife about the contents of the form she was about to sign. Mrs. Casandra believed that she was asked to dress as a wookie in the evenings, and this lie arguably induced her into signing the contract. The key point is that the wife did not read the form before signing it.
A similar case would be Redgrave v Hurd 1, in which the defendant did not read the documents to verify the wrong statements made by the plaintiff. The defendant had already signed the contract when he learned about the plaintiff’s incorrect remarks. However, his defence for fraudulent misrepresentation failed, as the plaintiff did not plea his statements were untrue. Instead, innocent misrepresentation rescinded the contract. In the case before us, unfortunately it seems that Mr. George was aware of his untrue statement.
However, there are cases that found the party at guilt for not taking the initiative of reading the agreement they’re signing. In L’Estrange v F.Graucob Ltd. 2, Scrutton L.J. held that “in the absence of fraud, it was immaterial that the defendant had not read the agreement”.3 The exclusion clause was found to be a part of the contract simply because Miss L’Estrange signed the agreement. Although under UCTA 19774 the exclusion clause would be invalid, this ratio could have been used to stress that Mrs. Casandra signed the document which she didn’t read at her own risk, had misrepresentation between wife and husband not been specifically addressed by Lord Nicholls in the below case.
Royal Bank of Scotland Plc v Etridge 5, which established the most authoritative precedent in surety cases involving husband and wife, lays out the rule for misrepresentation made by a husband to his wife. Lord Nicholls states that when there’s “inaccurate explanation”6 of the transaction in “misleadingly incomplete”7 manner, the wife can claim misrepresentation because the husband must not abuse the influence he has, as the wife reposes her trust and confidence to him. To conclude, it seems highly probable that misrepresentation claim will be successful.
Secondly, the plaintiff can claim undue influence, which would make the agreement voidable. Up until Etridge, undue influence was classified as; class 1 actual undue influence, and class 2 presumed undue influence (either by relationship of influence or a manifestly disadvantageous transaction). In Etridge, these classifications have been united, and their distinction stands as ways of proving the claim rather than different classifications.8 In this case, Mrs. Casandra could argue presumed undue influence from a special relationship. Lord Nicholls in Etridge explained the nature of such relationships as “the relationship between two individuals may be such that, without more, one of them is disposed to agree a course of action proposed by the other.”9 It seems that the relationship between Mr. George and Mrs. Casandra exactly matches this description, as Mr. Ted, Death Star Banking manager, recalls Mr. George saying, ” Oh she’ll do anything I tell her, she won’t think twice”. The fact that Mrs. Casandra didn’t read the form she was signing also indicates the influence her husband has upon her.
The burden of proof rests in the party who makes the allegation of undue influence, and in this case the plaintiff. However, there are criteria that must be satisfied, and these include i) the personality of the parties, ii) their relationship, iii) the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case.10 It is the third criterion that might be used to rebut the allegations of Mrs. Casandra, as the ratio in National Westminster Bank Plc v Morgan 11 contributes. It follows that for undue influence to succeed, it is essential to show that the transaction was manifestly disadvantageous and that it was wrongful, since it took advantage of the person involved.12 National Westminster Bank was able to possess the house against the wife’s allegations.
Applying this defence is rational, as it can be argued that the contract made in this case was beneficiary both to the husband and the wife. Mr. George was able to get a loan for developing his business, and had he achieved great accomplishments, Mrs. Casandra would have the advantage of enjoying this wealth. Therefore, although the special relationship of husband and wife might have influenced Mrs. Casandra to sign the form, she wasn’t agreeing to a manifestly disadvantageous transaction.
After examining these claims, the procedural obligations of a bank in such cases must be outlined in order to advise Death Star Banking thoroughly. As mentioned, the problems arising from sureties have been in such large quantities that the common law responds by putting in effect specific rules that must be strictly followed. Though at a glance, these rules look as if they’re in much favour with the sureties, and especially with the wives, there are balancing factors.13
The first rule that must be followed by banks is placing the creditor on inquiry. Lord Nicholls explains the rule of inquiry as; “a creditor is put on inquiry whenever a wife offers to stand surety for her husband’s debts”14, and as a more general concept it is in circumstances when “the relationship between the surety and the debtor is non-commercial”.15 It seems that Death Star Banking failed to fulfil this criterion. Mrs. Casandra was neither given a constructive notice, nor put on inquiry about the nature of the transaction. Though Mr. Ted emphasises that he asked her whether everything was explained and received a positive answer, the constructive notice should have been more explanatory than that.
Barclays Bank plc v O’Brien 16 is a case where the wife was misrepresented and induced to sign a security for his husband’s debt. Although the bank gave constructive notice to the couple to ensure that both knew the nature of the transaction and had taken legal advice, the couple did not obey.17 The bank was held responsible for the lack of the fulfilment of the constructive notice. Therefore, Mr. Ted’s mere attempt to check with Mrs. Casandra whether everything was explained is not enough. The bank is responsible for not informing Mrs. Casandra about the transaction.
Although the decision of O’Brien seems to work for Death Star Banking’s disadvantage, there was an uncertainty about the test of inquiry and constructive notice that could have been used to justify Mr. Ted’s unofficial manner. Lord Browne-Wilkinson in O’Brien stated that for an inquiry the combination of two factors were necessary. The transaction had to be ‘on its face’ not to the financial advantage of the wife and there had to be a substantial risk in transactions that the husband was committing a legal or equitable wrong.18 Unfortunately, this discretionary power of the banks has been removed by Lord Nicholls in Etridge, and now there is no room for uncertainty about the inquiry rule. Simply, if a wife is a surety for her husband’s debts, then there must be an inquiry.
Another criterion that the banks must follow is ensuring that the wife is receiving an independent legal advice about the transaction. This private interview does not have to be held by the bank, and as a matter of fact, it is suggested for banks not to hold this interview, so that the allegations of misrepresentation would not arise. 19 The independent legal adviser is to receive the financial status of the husband from the bank, and reveal this information to the wife so that the wife is to know about her husband’s debt.20 Thereafter, the independent legal adviser will provide a certificate to the bank.
It is held in Bank of Baroda v Rayarel 21 that a certificate from the legal adviser gives a reasonable assumption to the bank that the advice is correct. This presumption still exists to the extent that the constructive notice cannot be dispelled because of this certificate, unlike in Rayarel.22 However, if a bank has correctly applied all the rules, and yet the wife sues for an invalid contract because of the deficient advice from the independent legal adviser, the deficient advice will not be imputed to the bank under the Law of Property Act 1925 section 199.23
Back to the case before Death Star Banking, Mrs. Casandra seems to have received no independent legal advice. It is suspicious if she had received any legal advice at all. On those grounds, the case seems to resemble much of O’Brien. A possible defence that can be used would be that as a matter of causation, even if the wife had received a full and detailed advice, she would still have supported the transaction.24 The relationship of the couple was structured in such a way that the husband became the decision maker, and even if Mrs. Casandra received legal advice, she would have overlooked the information. It must be minded that this defence is purely speculation.
Overall, Death Star Banking has been negligent as to what the law requires them to do. They were unprofessional. But if this case occurred a few decades ago, the defences provided would have been successful. However after Etridge, it seems that banks are not tolerated for noncompliance with the requirements hitherto stated.