#2199 - Royal Bank Of Scotland V Ettridge - Contract Law

Royal Bank of Scotland v Ettridge [2001] 4 All ER 449

House of Lords

Basic Facts

In all 8 appeals, a wife charged her interest in the matrimonial home to a bank for security of the husband’s debts or for the benefit of his business. The wife later asserted she had signed the document under the undue influence of her husband.

Issue for the court

When does undue influence arise?

Held Lord Nicholls of Birkenhead

• If the intention was produced by an unacceptable means, the law will not permit the transaction to stand.

  • The means used is regarded as an exercise of improper or "undue" influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person's free will.

• Equity has indentified two forms of unacceptable conduct:

  • The first comprises overt acts of pressure or coercion such as unlawful threats

  • The second form arises out of a relationship between two persons where one has acquired over another a measure of influence of which the stronger person then takes unfair advantage

    • The law has recognised that this class needs protection just as much as the first.

    • But which relationships will be recognised is undefined

      • Essentially it is any relationship where sufficient trust and confidence has been put by one in the other

        • Not just a narrow list of specific relationships.

        • If you fall into some of the most common ones then this will be enough to show trust and confidence

          • Husband and wife does not fall into this category, however, as there is nothing unusual in a wife, with motives of affection, conferring substantial financial benefits on her husband.

            • therefore it must be proved that there was sufficient trust and confidence in the normal way.

• Equally, while it is not necessary for the purposes of undue influence for a person to suffer detriment

  • BUT questions of undue influence will not usually arise where the transaction is innocuous.

    • It will normally only be considered where the transaction was disadvantageous either from the outset or as matters turned out.

• Proof that C put trust and confidence in the other party in relation to the management of financial affairs

  • Coupled with a transaction that calls for explanation

    • Will lead to a rebuttable presumption of fact of undue influence and shift the burden of proof to the party relying on the contract to prove that this inference should not be drawn

• For independent advice, this will normally bring home the consequences of an action to C

  • But this is not conclusive – a person may fully understand the implications of a transaction while still being under undue influence

    • Whether independent advice rebuts undue influence is a fact to be considered in all the circumstances of the case.

Manifest disadvantage

• The transaction must not be readily explicable from the relationship of the party

  • This second element is necessary to keep the law from being too broad

  • Cos clearly absurd if every transaction between child to parent could be explained as undue influence unless the contrary is affirmatively proved

    • These ordinary transactions do not suggest that something is amiss

      • Something more is needed – and the greater the disadvantage to the vulnerable person, the more cogent the explanation must be before the presumption is rebutted.

• Problem with phrase “manifest disadvantage” is that it can be abused and lead to uncertainty

  • Can a wife enter into a transaction for her and her husband’s benefit and be at a manifest disadvantage?

    • Perhaps narrowly she can, as she undertakes a serious financial obligation, and in return she personally receives nothing.

      • But that would be to take an unrealistically blinkered view of such a transaction

      • However, the correct approach is just to jettison the label and substitute “transaction that cannot be readily explained” instead.

C and the third party - suretyship transactions

• Law has to protect both parties – wife from relationship that can be abused, bank from lending credit and it then being set aside

  • Is true that O’Brien extends the law

    • Meaning that while the law imposes no obligation on one party to a transaction to check whether the other party's concurrence was obtained by undue influence.

      • in certain circumstances, a party acting in good faith may lose the benefit of his contract

        • if he ought to have known that the other's concurrence had been procured by the misconduct of a third party.

    • This only serves to minimise the risk of the wife entering into a transaction with misapprehension caused by her husband’s undue influence.

When is the bank put on inquiry?

• quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts.

  • It is not on inquiry if the mortgage is to both jointly unless the bank is aware that the money is mainly for the husband’s purposes

• Once on inquiry, it’s not up to the banks to discover for themselves whether the consent of the wife is from undue influence

  • Nor should banks be expected to insist on confirmation from a solicitor that the solicitor has satisfied himself that the wife's consent has not been procured by undue influence

• All a bank is expected to do is take reasonable steps to satisfy itself that the wife has had brought home to her the practical implications of the proposed transaction

  • Means she goes into the transaction with her eyes open.

    • Equally, it is not for the solicitor to veto the transaction by declining to confirm to the bank that he has explained the risks

      • If the solicitor considers the transaction is not in the wife's best interests, he will give reasoned advice to the wife to that effect – but it’s up to her ultimately.

      • The advice given need...