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Allan, Barry --- ""Trust me, I'm Your Husband" : Undue Influence and Royal Bank of Scotland v Etridge" [2006] OtaLawRw 6; (2006) 11 Otago Law Review 247


"Trust Me, I'm Your Husband": Undue Influence and Royal Bank of Scotland v Etridge

Barry Allan*

It is by now well established that a lender who accepts a guarantee will not be able to enforce it when taken with notice that the guarantor gave it because of excessive pressure or misrepresentation by the debtor. It is equally well established that a lender who insists that the guarantor be given proper legal advice before proceeding with the transaction can in that way insulate itself from being caught up in the debtor's wrongdoing.1 In England and New Zealand, the problems arising in this context have almost universally been subjected to an undue influence analysis to decide whether the lender is to be entitled to its contractual rights.2

Anyone seeking to set aside a guarantee on the ground of undue influence must establish it. This simple proposition branches out into two questions to which there are no simple answers. The first is what is meant by undue influence; what must be present before a court will decide that undue influence is available to vitiate a transaction? Why does it intervene? The second relates to what must be proved in order to satisfy a court; of what relevance is it that there is a relationship of trust and confidence between debtor and guarantor, particularly in relation to financial affairs? Courts have long accepted that within the context of certain relationships there is a presumption of undue influence. The consequence of such a presumption is that if a transaction calling for explanation arises from within such a relationship, then a second presumption comes into play, that the transaction is the result of the undue influence.3

It has never been accepted that a relationship of husband and wife leads to a presumption of undue influence.4 Influence, maybe, as no-one is free from influence, but not undue. In the context of domestic relations, the only established presumption is that parents are in a position of influence in respect of their children. Nonetheless, it is obvious that there will be particular relationships within which one party is ascendant over the other, even if that is not characteristic of all similar relationships. Some husbands will, thanks to the particular dynamics of their relationship with their wives, be in a position they can take it for granted that the wife will give a guarantee and secure her

Lecturer, Faculty of Law, University of Otago.

Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 remains the leading New Zealand

authority to this effect.

In Australia, undue influence has been eschewed in favour of an unconscionable

bargain analysis: Garcia v National Australia Bank [1998] HCA 48; (1998) 155 ALR 614.

There are earlier cases but Allcard v Skinner [1887] UKLawRpCh 151; (1887) 36 Ch D 145 is most commonly

cited as the source of this proposition.

Lord Scarman in Westminster Bank Plc v Morgan [1985] UKHL 2; [1985] AC 686, 703 says there are

"plenty of confidential relationships which do not give rise to the presumption of

undue influence", most notably that between a husband and wife, citing Bank of

Montreal v Stuart [1910] UKLawRpAC 53; [1911] AC 120.

248 Otago Law Review (2006) Vol 11 No 2

obligations against any interest she may have in the family home. Some wives will have that power within the relationship.5

It has been suggested that "undue influence is largely a problem of heterosexual relationships, not homosexual ones",6 but gender is not the only explanation for undue influence. Whenever there is any form of relationship between people, there is the potential for power imbalances. The particular relationship addressed in this article is that between, for want of a better word, spouses - those who are in a marriage-like relationship, whether it has been formalised or not. The parties live together and it is their home which is at stake. Guarantees given within such relationships provide an "intersection between domestic and commercial agreements"7 which differs from gifts and other situations in which guarantees are given. Upholding contracts and the indefeasibility of property interests is of fundamental importance. While the debtor's own interests will be an important factor in seeking a guarantee, the guarantor's self interest is likely to play a large part in deciding to agree. Furthermore, the debtor may well be intending to act in the best interests of the family. In many such relationships, the interests of debtor and guarantor will coincide.

There has been a marked difference between the courts in New Zealand and England on the place "normal family relations" play in establishing undue influence. In Barclays Bank plc v O'Brien,8 the very existence of normal family relations seemed to imply that family members would have diminished regard for their own interests, and so needed a high degree of protection from the doctrine. By contrast, in ASB Bank Ltd v Harlick,9 the giving of a guarantee was regarded as the very stuff of a family relationship and so would not be of any concern, in the absence of actual pressure. Although the Court of Appeal in Wilkinson v ASB Bank Ltd10 is clearly more aware of the potential for "normal family relations" to lead to undue influence, it is more restricted in its approach than that taken by Lord Browne-Wilkinson in O'Brien.

New Zealand courts must now deal with the question of what to do about the House of Lords' decision in Royal Bank of Scotland v Etridge.11 Twice now, the Court of Appeal has indicated that Etridge may well bring about a revision of approach in New Zealand. In Attorney-General for England and Wales v R,12 Tipping J, faced with the decision in Etridge arriving on his desk as he was writing his opinion, could really do no more than suggest that it represented developments that might necessitate revisiting the approach to be taken. Ultimately, however, he regarded Etridge as having no impact on the decision under consideration.

More attention was paid by William Young J in Hogan v Commercial Factors

Barclays Bank v Rivett [1999] 1 FLR 730 is one of the few cases where a husband has

alleged undue influence against his wife.

Auchmuty, R "When Equality is not Equity: Homosexual Inclusion in Undue

Influence Law" (2003) 11 Feminist Legal Studies 163,165.

Auchmuty, ibid, 260.

[1993] UKHL 6; [1994] 1 AC 180.

[1996] 1 NZLR 655.

[1998] 1 NZLR 674.

[2001] UKHL 44; [2002] 2 AC 773.

[2002] 2 NZLR 91,115.

Undue Influence and Royal Bank of Scotland v Etridge 249

Ltd,13 in which he identified the potential for there to be differences in approach between Etridge and Wilkinson. His Honour took the view14 that Etridge was not changing the legal landscape greatly, saying that it, and the earlier case of O'Brien, were "creative" in their identifying the circumstances in which banks would be affected by undue influence but were "otherwise merely declaratory" of the law of undue influence. As is discussed below, in its retraction from the position taken in O'Brien and its re-formulation of the application of presumptions of undue influence, the House of Lords did more than merely "declare" the law.

While it clearly and correctly rejected any suggestion that the exercise of undue influence is to be presumed from the mere fact of a spouse guaranteeing the other spouse's debts, it was less than clear as to whether any presumptions survive in this area and what their content might be. A much cleaner result would have been reached if it had not allowed for any possibility of presumptions beyond those described above. Such a result can be reached by clearly articulating what amounts to undue influence and recognising that the matters necessary to create any presumption are matters which, if proved, come so close to proving undue influence is present that presumptions have no continued utility in this context.

As for whether the lender was to be taken as having notice of any undue influence exercised by the debtor, His Honour was curiously circumspect as to whether the Etridge approach, under which banks are "on notice" in respect of all non-commercial guarantees, was to be applied. That approach "is by no means the same as that taken"15 in Wilkinson, raising the possibility of conflict between the two cases. Even if Lord Nicholls'16 test were to be applied, the guarantor could not succeed. But "this case does not turn on whether we apply Etridge"17. While that approach was "highly likely" to be taken in future cases to decide if a creditor was on inquiry "at least in banking cases" and any lender seeking guarantees "would be well advised to allow for the possibility" of Etridge becoming the law in New Zealand, the Court of Appeal specifically refrained from its formal adoption and application in Hogan. While far from optimal, the Etridge test is less flawed than that postulated in Wilkinson.

The troubled question of definition

Undue influence, of course, is not just about spouses giving guarantees: it is difficult to place limits on the contexts in which it might come to be applied. As a consequence, the courts have been unwilling to confine its potential application by pinning it down with any precise meaning. The irony is that courts have nonetheless been prescriptive in their recognition of two categories of undue influence. The "court will not intervene to set aside the transaction unless the claimant brings his case within one of the two categories of undue influence."18

13 [2004] NZCA 269; (2005) 8 NZBLC 101,611.
14 Hogan, ibid, 101,616.
15 Hogan, ibid, 101,618.

  1. While they all to some extent provide some reasoning of their own, Lord Bingham,
    Lord Clyde and Lord Hobhouse expressly support the reasoning of Lord Nicholls.

17 Hogan, supra n 13,101,618.

  1. Powlowski, M & Brown, J. Undue Influence and the Family Home, London: Cavendish,
    2002, 33.

250 Otago Law Review (2006) Vol 11 No 2

The first, actual undue influence, is kept within narrow bounds and is, as a result, not commonly relied upon. To amount to undue influence, there must be some active or overt exercise of power.19 Under this defendant-sided approach, a "fetter is placed on the conscience"20 of the defendant to prevent what some commentators call "wicked exploitation". In the absence of anything overt, there is no undue influence. This was the stance taken in Westminster Bank Plc v Morgan21 where Lord Scarman rejected a vague public policy basis for intervention in favour of victimisation.22 The second category, presumed undue influence, is a group of essentially fiduciary relationships23 where the requirement of actual proof of the exercise of undue influence is dispensed with. Within these relationships, the reposing of trust by one party in another is so notorious, and the relationship so ripe for abuse, that any material benefit passing to the ascendant party is presumed to be the result of undue influence.

This bipolar structure has developed in the context of gifts: it may well be appropriate to be suspicious of gifts given within the context of a confidential relationship and call upon donees to justify them. This does not mean the same structure is useful in resolving problems with alleged spousal undue influence leading to guarantees. The real problem captured by the phrase "undue influence" is the absence of autonomy; the narrowness of actual undue influence means many situations of lost autonomy fall outside its definition. Of particular concern is where there is a spouse who will, simply as a result of trust placed in the other spouse, do whatever is asked without any form of pressure or persuasion. Because spouses do not benefit from any presumption, where they give a guarantee which, because of vulnerability, is not given freely they will not be protected by the doctrine in its traditional formulation.

One possible response is to revisit this formulation. By having an understanding of "improper conduct" which goes beyond the overt to include passive acceptance of benefits from those of impaired will, appropriate protection can be given with little need for reliance upon presumptions. This does require giving attention to what, in the context of spouses giving guarantees, will amount to improper conduct sufficient for a court to find that the guarantee was the result of undue influence. Evidence can then be adduced which will or will not

In Allcard v Skinner, supra n 3, Lindley LJ at page 182 described the various ways in which influence might be used as "some unfair and improper conduct, some coercion from outside, some over-reaching, some form of cheating, and generally, though not always, some personal advantage obtained by a donee placed in some close and confidential relation to the donor..". Ibid, 191, per Bowen LJ. [1985] UKHL 2; [1985] AC 686, 705.

Despite this specific rejection of public policy, recent UK Court of Appeal decisions, such as Hammond v Osborn [2002] EWC A Civ 885 and Pesticcio v Huet [2004] EWC A Civ 372, have rejected wrong-doing as a requirement for setting aside gifts on the ground of undue influence, saying that it is a matter of public policy. The relationships commonly referred to as leading to this presumption include those between parents and their children, guardians and their wards, trustees and beneficiaries, solicitors and clients, medical advisers and patients and priests and confessors. Justifications for this position include the vulnerability of the weaker party and the quasi-fiduciary character of the relationship.

Undue Influence and Royal Bank of Scotland v Etridge 251

satisfy the court that undue influence is present. There is no reason why providing clarity in this particular context should foreclose the court's ability to deal with undue influence in other contexts.

On whatever principle the courts intervene on the grounds of undue influence, it is not to save people from the consequences of their own folly, imprudence, or want of foresight.24 In order to maintain the legal significance accorded signed contracts and the indefeasibility of registered property rights, something more than a mere failure to read or understand is needed.25 At the same time, the law needs to avoid operating as an inhibiter of trust and confidence within marital relationships.

One possible approach is to adopt a plaintiff-sided analysis in which impairment of the quality of the consent given to the guarantee is the criteria for relief.26 Rather than the overt pressure requirement of the defendant-sided analysis, this approach would focus on the clouded judgment of the plaintiff.27 It is unlikely, however, that either provides a complete account of why a court ought to intervene on the ground of undue influence.

A synthesis of the two approaches, which recognises that the "wickedness" must either cause impaired consent or lie in the taking advantage of it, is more accurate. As Bigwood says, all the rivalrous explications of undue influence are "challenged by insurmountable imprecision and contradiction in the case law".28 The Court of Appeal in Contractors Bonding v Snee29 certainly endorses a more dualistic approach, by saying that undue influence is some form of improper conduct leading to the conclusion that a disposition was not the result of a free exercise of will. This approach recognises "that the freedoms and interests of both parties are engaged in assessing the justice, hence ultimate bindingness, of a contract, and so a court must fairly take both into account"30 when deciding whether to set aside a guarantee on the ground it was induced by undue influence. This has been given limited acceptance in the UK Court of Appeal. In Dunbar Bank plc v Nadeem,31 Mrs Nadeem always signed whatever her husband asked her to, without reading or understanding it. Millett LJ found that the husband's mere position of dominance, in which "the mind of the latter became a mere channel through which the wishes of the former flowed"32 made any coercion, pressure or deliberate concealment unnecessary in establishing actual undue influence. The absence of any "unfair advantage" taken by the husband

24 Allcard v Skinner, supra n 3,182 - 83, per Lindley LJ.
25 Toll (FGCT) Ltd v Alphapharm Pty Ltd (2004) 211ALR 342.

  1. See Webb, D "Legal Advice in Surety Transactions: A Duty Based Approach" (2001)
    19 NZULR 259,268 - 271 and the lengthy discussion of relational undue influence
    in chapter 8, Bigwood, R. Exploitative Contracts, Oxford: Oxford University Press,
  2. Clouded judgment is not irrelevant in the defendant-sided analysis but, rather
    than establishing actual undue influence, its consequences would be worked out
    through a sequence of presumptions.

28 Bigwood, R. Exploitative Contracts, supra n 26,470.
29 [1992] 2 NZLR157,165.
30 Bigwood, supra n 26,473.
31 [1998] EWCA Civ 1027; [1998] 3 All ER 876, 883.
32 Quoting Tufton v Sperni [1952] 2 TLR 516 at 532 per Morris LJ.

252 Otago Law Review (2006) Vol 11 No 2

saved the transaction. Stuart-Smith LJ in Royal Bank of Scotland v Etridge (No 2)33 was clear: he acknowledged that actual undue influence involved a guarantor not giving it "of her own free will but as a result of actual undue influence exerted pressure" but that "pressure is neither always necessary nor always sufficient".

Certainly in identifying what is meant by undue influence, Lord Nicholls in Royal Bank of Scotland v Etridge34 takes the same approach as the New Zealand court did in Snee. The objective of undue influence is "to ensure that the influence of one person over another is not abused" by setting "firm limits" on the means properly employable in the use of influence. While undue influence is concerned with "the manner in which the intention to enter into the transaction was secured"35 so that "if the intention was produced by an unacceptable means, the law will not permit the transaction to stand" but only if "the consent thus procured ought not fairly to be treated as the expression of a person's free will".36

Lord Nicholls does recognise that there are situations where one person's influence over another "provides scope for misuse without any specific overt acts of persuasion" so that, thanks to that influence, "one of them is disposed to agree a course of action proposed by the other". This will generally be when "one person places trust in another to look after his affairs and interests, and the latter betrays this trust by preferring his own interests". This reposing of trust is a more important criterion than any enquiry into whether the relationship fits into a particular type.

So, a transaction where one party clearly has great power to influence the other, and even purports to use it, ought nonetheless to be upheld if it is truly the result of a free choice of the other party37 - in other words, if somehow it could be shown that, despite bullying or other forms of pressure, that is what would have been done all along,38 making the exercise of pressure irrelevant. On the other hand, the law is quite clear that absence of free will does not itself vitiate a transaction: a contract with an "unsuspected lunatic" or someone who lacks contractual capacity, even if unfair, is valid.39 Something more is needed before the law will allow a contract to be set aside: knowledge of the incapacity. By analogy, there will be undue influence if a spouse obtains a guarantee from someone known to have no ability to resist.

A question of degree

There is a further question - even where there is "wickedness" and impaired will, how bad must things be before a transaction can be characterised as the result of undue influence? It is extremely difficult, if not impossible, to answer this in the abstract. One problem in this context is that conduct which will be of great influence to one person may well find another impervious to it. If the

[1998] 4 All ER 705, 712.

[2001] UKHL 44; [2002] 2 AC 773.

Citing Huguenin v Baseley (1807) 14 Ves 273,300.

Etridge, supra n 11, 794 - 95.

Bank of Scotland v Bennett [1997] 1 FLR 801, 822.

Such as by evidence of agreement which predates the bullying.

O'Connor v Hart [1985] UKPC 17; [1985] 1 NZLR 159.

Undue Influence and Royal Bank of Scotland v Etridge 253

concern is with the effect of one person's influence upon another, then an enquiry into the subjective state of mind of the guarantor together with an examination of the actual state of relations with the debtor must be undertaken. In Contractors Bonding v Snee40 the Court of Appeal set the threshold as being "conduct within a relationship which justifies the conclusion that the disposition or agreement was not the result of a free exercise of the disponer's will". The guarantor was so vulnerable and felt such a sense of obligation to her son that the test was satisfied on the facts, despite the legal advice she had received.

Then, in ASB Bank Ltd v Harlick41 the Court of Appeal quoted a test formulated by Birks and Chin,42 with apparent approval. Their test looked for a "degree of reduced autonomy on the part of the one and a corresponding degree of control or ascendancy on the other", such that there is an exceptional relationship in which there is so much influence, or excessive dependence, that it undermines the general presumption that adults have the capacity to manage their own affairs.

The learned authors made clear that this test did not require "an absolute surrender of one will to another":43 to require a state of absolute paralysis on the part of the plaintiff would be far too extreme. Rather, there needs to be a relationship which impairs "the autonomy of the weaker party to a serious and exceptional degree" or, to use their short-hand phrase, "excessive dependence". It is difficult, however, to accept their claim that an allegation of undue influence can succeed where the defendant is a person of "unchallenged integrity"44 and completely lacking in any improper behaviour.45 A debtor who consciously takes the benefit of a guarantee given in a situation of excessive dependence would be hard-pressed to establish a lack of improper behaviour.

So - while the particular state of mind is important, attention still needs to be paid to how the decision to enter the impugned contract was arrived at. A decision reached after a robust discussion between debtor and guarantor and a balancing of the various factors weighing upon the guarantor ought not be undue influence. A situation in which a guarantor's decision-making is overwhelmed by the debtor ought to be. Similarly where a guarantor trusts the debtor to make financial decisions for the both of them and the debtor either misleads the guarantor or exploits that trust for his or her own benefit. A debtor employing joint family property, or the sole property of the guarantor, to obtain financing needs to ensure that the financing is fairly applied to the benefit of the family, not for the guarantor's selfish ends. The combination of the trust placed in the debtor together with abuse of that trust will amount to proof of undue influence, not a mere presumption.

Matters that have been held to be important in deciding if a presumption of

40 [1992] 2 NZLR157,165.
41 [1996] 1 NZLR 655, 659.

  1. Birks, Peter and Chin Nyuk Yin "On the Nature of Undue Influence" in Beatson,
    Jack and Friedmann, Daniel (eds) Good Faith and Fault in Contract Law, Oxford:
    Clarendon Press, 1995, 57-97.

43 Ibid, 69.
44 Ibid, 72.
45 They cite Simpson v Simpson [1992] 1 FLR 601 as an example.

254 Otago Law Review (2006) Vol 11 No 2

undue influence exists - such as manifest disadvantage,46 legal advice or the guarantor's degree of involvement in the enterprise47 - are equivocal. It will be difficult to reconcile a claim of undue influence with a situation where the guarantor's evident motivation is the chance of advancement of family interests or those of the guarantor48 or to avoid potentially adverse situations not brought about by the debtor - such as the short-term borrowing to prevent loss of the home in National Westminster Bank plc v Morgan.49 Difficult, but not impossible; the guarantor's desire might be great enough to create vulnerability that can be seized upon. Questions of considerable subtlety do arise, but subtlety is no reason for them not to be resolved.

The hardest cases facing the law at present are what might be called "trust me" cases.50 These are the marginal cases. In a "trust me" case, the guarantor has left responsibility for making financial decisions to the debtor. They give a guarantee because of their faith in the debtor rather than as the product of any critical reflection. The debtor will not have exerted any pressure but will, at worst, have taken it for granted that the guarantee will be given. They will not have made any misrepresentation as to the risks involved, but will have rather failed to articulate the risks. They may well also have the genuine belief that obtaining the financing that has made the guarantee necessary is in their joint best interests. Is that enough to amount to undue influence?

This is the kind of situation addressed by Lord Browne-Wilkinson in Barclays Bankplc v O'Brien:51 in "a substantial proportion of marriages it is still the husband who has the business experience and the wife is willing to follow his advice without bringing a truly independent mind and will to bear on financial decisions". On his analysis, the fact of a wife being in this situation was enough to trigger the bank's notice of wrong-doing. Failure by the bank to take reasonable steps to protect the wife would render the guarantee unenforceable. There seems to be an underlying assumption that such a situation would be enough to amount to undue influence. There have subsequently been two decisions at first instance which have reached opposite conclusions on similar facts.52

No New Zealand case has set the threshold for undue influence so low. In Harlick, the matter that seems to have most impressed the court in deciding there was no undue influence was the absence of any persuasion or any feeling on the part of the parents that they could not refuse. The court reached its result by applying the test of whether the relationship involved "such degree of reliance and trust as suggests a real risk that a disadvantageous transaction has not resulted from the kind of informed and independent decision to be expected

46 Westminster Bank Plc v Morgan [1985] UKHL 2; [1985] AC 686.
47 Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674.
48 As was the situation in Akins v National Australia Bank (1994) 34 NSWLR 155.

  1. It was important in Morgan, supra n 46, that Mrs Morgan took bridging finance to
    avoid an impending loss of her home.
  2. As referred to by Chambers J in McGregor v Taylor & Co [2002] Lloyd's LR 468,

51 [1993] UKHL 6; [1994] 1 AC 180,183.

  1. McGregor v Taylor & Co [2002] Lloyd's LR 468 decided that the husband's failure
    to provide an analysis of the risks faced was undue influence. Bank of Ireland v
    Bongard [2003] EWHC 612 decided it was not.

Undue Influence and Royal Bank of Scotland v Etridge 255

from a person in the position of the party seeking relief but rather from the influence the other party to the relationship has in that position".53

Now Etridge has retracted from the broad approach taken in O'Brien. In discussing what will amount to a presumption of undue influence,54 Lord Nicholls appears to recognise that guarantees are a normal incident of the husband and wife relationship. He also appears to accept that a degree of anxiety or a lack of optimism are reconcilable with a guarantee which has been entered into without undue influence. He does not specifically address the "trust me" situation. Lord Scott does, indirectly.55 For him, it is to be assumed that a wife will place her confidence in her husband, and in the absence of evidence of abuse of that trust, no inference of undue influence can be drawn. His examples of what will amount to abuse of trust include unjustified over-optimistic enthusiasm, misrepresentation of material matters, excessive pressure, emotional blackmail or bullying.

On the other hand, Lord Hobhouse does suggest that when the wife trusts the husband to make her decision for her, he owes her a duty to deal fairly with her, which will extend to making sure she enters the guarantee "freely and in knowledge of the true facts".56 With respect, that does not follow as a natural conclusion from the fact of her trust: one would have thought that the point of the arrangement is the ability to leave the details to the husband. There is no basis for regarding the husband's mere silence as evidence of wrongdoing.

Etridge is clearly signalling a higher threshold for relief than that set by O'Brien but in doing so, it simply means it is in alignment with the approach already taken in New Zealand. This must be welcomed. By setting the threshold for undue influence so low in O'Brien, it opened up the curious possibility that (unless we are to take the view that simply by being a female, the wife is a victim) husbands and wives mutually exert undue influence over each other. This would be where both spouses provide guarantees for borrowings by a family company.

"Presumed undue influence"?

As mentioned above, there is a category of relationships where the requirement of actual proof of the exercise of undue influence is dispensed with - in cases of so-called "presumed undue influence". This class was, at least until 1990, within narrow bounds. In Bank Of Credit And Commerce International S.A. v Aboody,57 Slade L.J. adopted nomenclature under which this group of relationships came to be called class 2A situations of presumed undue influence. The very fact of there being such a relationship would give rise to a presumption of undue influence.

Because there was no such presumption that a husband has undue influence over his wife, Mrs Aboody could not rely upon class 2A. Indeed, most of the

53 Harlick, supra n 9, 659.
54 Etridge, supra n 11, 800.
55 Ibid, 842.
56 Etridge, supra n 11, 821.
57 [1990] 1 QB 923.

256 Otago Law Review (2006) Vol 11 No 2

cases coming to court have involved relationships where, in the particular relationship, there might well be an element of trust and confidence but actual undue influence, as traditionally understood, was missing. Such relationships might nevertheless fall into what Slade L.J. dubbed a class 2B relationship: where actual undue influence is not proven and no class 2A relationship is present but a relationship of trust and confidence can be established as fact. From this, a presumption of undue influence would arise.

As endorsed by the House of Lords in Barclays Bank Plc v O'Brien,58 this came to mean that whenever a guarantor could establish that the context for the giving of a guarantee was a relationship of trust and confidence with the debtor, then it would be presumed that the guarantee was the result of undue influence. In the language of Lord Browne-Wilkinson, this created an "equity" to have it set aside. Although the House of Lords in Morgan insisted upon manifest disadvantage as an element in all undue influence claims, this requirement would almost always be satisfied by the very presence of the guarantee under attack. Like a donor, a guarantor would be accepting a disadvantage or sacrifice by the act of becoming secondarily liable for the borrower's debts and would generally secure that obligation by mortgage (the point of the guarantee in the first place) and derive no benefit from the bank.

Lord Browne-Wilkinson in O'Brien did not confine this approach to husbands and wives59 (although the mere existence of such a relationship would amount to proof of trust and confidence). Any "emotional relationship" between cohabitees gave rise to a similar risk of exploitation of the emotional involvement. Indeed, he regarded the principle as going beyond cohabitees: the quality of trust and confidence was the touchstone.60 There is a need for some care here: he was pointing out that knowledge of such a relationship by a bank would bring them into awareness of the possibility of their guarantee being actuated by undue influence, not holding that such a relationship creates a presumption of undue influence. But a bank's knowledge of a relationship of trust and confidence will put the bank on notice: this is also the same factor which establishes a Class 2B presumption. So it appears that he intended that the class 2B presumption and the situations where a bank was to be treated as on notice be co-terminous, so long as the bank had knowledge of the relationship's existence.

Quite why a plaintiff was not to be put to proof of undue influence is never explained. There appears to be an implicit assumption at work that some form of overt pressure or causation is needed to amount to undue influence, rather

[1993] UKHL 6; [1994] 1 AC 180.

He cited Avon Finance Co. Ltd. v. Bridger [1985] 2 All ER 281, where a son deceived

his elderly parents to sign a second mortgage and guarantee, as showing that

other relationships could generate this conclusion. A better explanation of that

case is that, given the lender had appointed the son to procure the guarantee, it

had imputed knowledge of his deception.

And so, in Credit Lyonnais Bank Nederland NV v Burch [1996] EWCA Civ 1292; [1997] 1 All ER 144, the

Court of Appeal held that the junior employee was entitled to the benefit of a class

2B presumption, rather than making any finding as to whether the employer had

exercised undue influence over her.

Undue Influence and Royal Bank of Scotland v Etridge 257

than an improper taking advantage of a relationship of trust and confidence. The logic of allowing proof of something that is not regarded as undue influence sufficing in place of proof of undue influence is elusive.

No New Zealand court, except for the over-ruled High Court decision in Harlick,61 has ever fully embraced the O'Brien test. The one decision which has spoken at all seriously about an O'Brien-like test was Wilkinson vASB Bank Ltd.62 Rather than embrace the open-textured test of O'Brien, Blanchard J's test was rather more nuanced, and in particular would not treat proof of a relationship of trust and confidence as prima facie proof of undue influence.

In Wilkinson, his Honour said that when trying to decide if a case came within the so-called class 2B, there had to be both a relationship of trust and confidence and a presumption of undue influence or misrepresentation. There could only be such a presumption if the guarantor had limited commercial ability, no more than a minimal financial stake in the enterprise guaranteed and a relationship involving an emotional tie or dependency on the part of the guarantor towards the principal debtor. While we can criticise this last element as really being a restatement of what he saw as necessary in addition to the presumption, clearly more than an emotional tie is needed. Furthermore, it should never be "overlooked"63 that the guarantor might have been motivated to give a guarantee by the anticipation of some indirect personal advantage to be obtained as a consequence of giving the guarantee. This would particularly be so if the guarantee was given to assist some family business. In this, his Honour evokes the fairly robust approach taken by the Court of Appeal in Harlick, where it characterised the parents' giving of a guarantee to secure their daughter's debt (in the absence of any pressure or even persuasion) as an incident of a "normal family relationship".

Enter Etridge

The attempt by Mrs Etridge to set aside a guarantee nicely illustrates the potential for confusion arising from the recognition of class 2B. At trial, the judge had held that she failed to establish any undue influence at all, but was nonetheless entitled to the class 2B presumption to avoid the guarantee, a logical impossibility as the absence of undue influence ought to have rebutted any presumption as to its existence. In the House of Lords, Lord Hobhouse most directly raises the problem created by recognising class 2B: as soon as there is a relationship in which someone has reposed trust and confidence in another person, it simply presumes that person to be a "wrongdoer".64 It was not at all clear that the mere "existence of such relationship raises the presumption of undue influence". Lord Scott saw undue influence as a "relatively unlikely"65 explanation for wives giving guarantees.

As a result, the House of Lords was unanimous in rejecting any continued

61 Harlick v ASB Bank Ltd (1995) 5 NZBLC 103,675.
62 [1998] 1 NZLR 674.
63 Wilkinson, ibid, 691.
64 Etridge, supra n 11, 821.
65 Etridge, ibid, 843.

258 Otago Law Review (2006) Vol 11 No 2

application of class 2B presumed undue influence, on the basis it was not a useful forensic tool and had the potential to confuse. Etridge clearly retains class 2A: Lord Nicholls refers to these as situations where the law "irrebutably" presumes trust and confidence,66 although that is not the same as presuming undue influence has been exercised. It also clearly preserves class 1, where there is no need for any relationship involving trust and confidence: undue influence is constituted by the "express conduct overbearing the other party's will".67

But Etridge retains some residual "other" class. Under the new formulation proposed, as in Wilkinson, a relationship of trust and confidence is just the starting point. To create a presumption or "inference" of the exercise of undue influence, there must also be a transaction calling for an explanation.68 This second requirement makes the difference between Etridge and O'Brien qualitative rather than merely semantic. It is clear that this requirement is not to be equated with "manifest disadvantage",69 which was generally satisfied by simply looking to the potential burden of a guarantee and the absence of any direct benefit. On that basis, there would virtually always be manifest disadvantage.

Such an interpretation would be "unrealistically blinkered"70 because there might well be inherent good reasons for a guarantee being to the overall benefit of the guarantor. This would particularly be so where the fortunes of husband and wife "are bound up together" - such as where the husband's business is the source of the family income. In those circumstances, "a wife's affection and self-interest run hand-in-hand in inclining her to join with her husband in charging the matrimonial home, usually a jointly-owned asset, to obtain the financial facilities needed by the business". Again, this is strongly reminiscent of the approach taken by the New Zealand Court of Appeal in Wilkinson.

In consequence, Lord Nicholls did not see the existence of a guarantee by a wife as calling for explanation. In fact, "in the ordinary course" such a guarantee is not normally "explicable only on the basis that it has been procured by the exercise of undue influence by the husband".71 In other words, something exceptional would be needed to make a wife's guarantee require explanation, because they frequently enter into such transactions and often have good and sufficient reasons to do so. Thus, they could not be treated as prima facie evidence of the exercise of undue influence by husbands.

His Lordship leaves us in the position that something more needs to be proved in order to make the guarantee one that calls for explanation, which will then merely create a rebuttable presumption that it has been obtained by undue influence. This would be in the sense of a shift in the evidential burden, working along the same lines as the principle of res ipsa loquitar in negligence law.72 This

66 Etridge, ibid, 797.

  1. Per Lord Hobhouse, at 820, who would include duress and misrepresentation as
    examples of actual undue influence.

68 See Lord Nicholls, at 796, and Lord Hobhouse, at 822. This is, of course, a reiteration

of Allcard v Skinner.
69 Introduced by National Westminster Bank plc v Morgan [1985] UKHL 2; [1985] AC 686.
70 Etridge, supra n 11, 799.
71 Etridge, ibid, 800.
72 Etridge, ibid, 797.

Undue Influence and Royal Bank of Scotland v Etridge 259

analogy "confuses rather than elucidates" because of a lack of clarity as to whether the principle shifts the legal or a merely tactical burden of proof.73 Furthermore, that principle allows proof of negligence on the basis that that is the most logical explanation for harm suffered, but his Lordship has already rejected undue influence as the most logical explanation for guarantees given by wives.74

While Lord Nicholls clearly recognises some continued utility for a presumption, so that there must be some "gap" between what has to be proved to establish a presumption of undue influence and proof of undue influence, it is not so clear that his opinion is shared by the other Law Lords. Under Lord Hobhouse's duty of fair dealing, a husband would need to acquaint his wife with all the facts, failing which he would need to "justify" the guarantee or see it regarded as the result of an abuse of confidence. But he also says that a conclusion that confidence had been abused could only be reached in light of the evidence, which would inevitably cover "whether there has in fact been an abuse of confidence or any other undue influence".75

Lord Scott characterises the cases where trust is abused as including the expression of "quite unjustified over-optimistic enthusiasm", the positive misrepresentation of his business intentions or of the nature of the security he is asking his wife to give. Alternatively, there might be excessive pressure, emotional blackmail or bullying. These last three are, of course, examples of conduct that fall into class 1 undue influence. The first three could just as easily be classified as amounting to undue influence. They are certainly as susceptible of proof as the last three. His Lordship correctly says that the existence of matters such as these cannot be presumed simply from the existence of the relationship, but must be proven. But by proving them, the actual existence of undue influence itself is then proved. The result is that there may be no "gap" between what has to be proved to establish a presumption of undue influence and proof of undue influence. The "proof of facts that raise an evidential presumption would simultaneously constitute the proof of actual undue influence".76

Perhaps a more accurate formulation of the ideas at play here is to recognise that, just as in any trial where particular facts have to be proved, there is the persuasive burden that falls upon every party who sets out to establish those facts. Someone alleging undue influence is seeking to displace the strict liability that is the normal consequence of a contract and the principle of indefeasibility attracted by a registered mortgage, so needs to put forward sufficient evidence to convince the court that undue influence was present. As in every trial, judges can draw inferences from the evidence and make credibility decisions about

Sim, D "Burden of Proof in Undue Influence: Common Law and Codes on Collision

Course" (2003) 7 Int Jnl of Evidence and Proof 221, 227.

Lord Hobhouse, at 822, was less enthusiastic, saying "provided it is remembered

that the burden is an evidential one, the comparison with the operation of the

doctrine res ipsa loquitur is useful".

Etridge, ibid, 822.

Phang, A& Tjio, H "The Uncertain Boundaries of Undue Influence" [2002] LMCLQ


260 Otago Law Review (2006) Vol 11 No 2

that evidence. Where evidence is uncontested,77 the party relying upon it has an easier run than when it is contested. There is no "presumption" at work here. This is consistent with what Lord Hobhouse says:

the general burden of proving some form of wrongdoing remains with the wife [but her evidence may] suffice to raise an inference of wrongdoing which the opposite party may find itself having to adduce evidence to rebut. If at the end of the trial the wife succeeds on the issue of undue influence, it will be because that is the right conclusion of fact on the state of the evidence at the end of the trial, not because of some artificial legal presumption that there must have been undue influence.78

So, if Phang & Tjio are correct, that exactly the same facts used to create a presumption will also prove the existence of undue influence, there is no ongoing need for class 2B or any form of replacement: its work has been taken up by an expanded class 1. This would answer the problem raised by Ridge,79 that it is not clear whether the House of Lords is saying that undue influence is undue influence, but within particular fact patterns, special evidentiary rules can be deployed to prove it, or that there is still a vital distinction between actual undue influence and presumed undue influence, which is based on the recognition of fiduciary relationships. What was called class 2A continues, in which the fiduciary relationship justifies the special evidentiary rules. The situations which might have been recognised as falling within class 2B are in reality examples of an expanded conceptualisation of actual undue influence, and no special presumptions are needed as undue influence based on the taking advantage of vulnerability is no less capable of proof by evidence than that based on overt pressure and the like. As has been unanimously recognised by Etridge the mere fact of a spouse giving a guarantee is simply not enough to amount to any kind of proof of the existence of undue influence. It is likely that the factors referred to in Wilkinson as creating a presumption are also too equivocal to provide reliable evidence of undue influence.

The lender's difficulties in this regard are that it is unlikely to have much evidence concerning the internal workings of the relationship and there is a certain incentive on the debtor to be less than forthcoming with evidence of assistance to the lender. Etridge, supra n 11, 822. Lord Scott says much the same, at 842 - 843, and makes specific reference to there being sufficient evidence adduced to justify a finding of undue influence on the balance of probabilities. Lord Clyde, at 817, speaks of there being "certain relationships" where it will be relatively easy to establish undue influence whereas in others, evidence will be needed to "fortify" the case. That evidence might be of unfair pressure or abuse of a "trusting and confidential" relationship resulting in disadvantage - something generally required in cases of presumed, not actual, undue influence. He nonetheless says that division into actual and presumed undue influence is illogical, and confuses definition with proof.

Ridge, P "Uncertainties Surrounding Undue Influence: Its Formulation, Application and Relationship to Other Doctrines" [2003] NZ Law Rev 329.

Undue Influence and Royal Bank of Scotland v Etridge 261

Notice and the impact of legal advice

Lenders will almost never have actual notice of a debtor's undue influence upon the guarantor. If the lender has constructive notice of that influence, however, then it is accepted that proper legal advice will remove the consequences of that notice. As Webb points out,80 the giving of this advice to the guarantor does nothing to change the lender's state of knowledge as to the relationship between guarantor and debtor. But this is the realm of legal fiction here: if the courts can generate an artificial rubric by which a lender is taken to know of undue influence, then they can generate another to decide when the lender will not have knowledge. Legal (or any independent) advice has a long history of displacing presumptions (or fictions) of influence.

There is considerable alignment between Wilkinson and Etridge as to what is required in terms of legal advice to displace any constructive notice of undue influence. Both require that the lawyer be independent, but accept that the lender can trust it to the lawyer's professionalism to resolve any potential conflicts of interest. Both require that the lawyer certify to the lender that the effect and implications of the documents have been explained and that the guarantor appeared to have understood the explanation. Neither insists that the lawyer certify that the guarantor actually did understand, for the obvious reason that that would place an unreasonable burden upon the lawyer. The lawyer needs to ensure that the guarantor has been given advice about the debtor's creditworthiness, the risks involved in the guaranteed transaction and the financial exposure undertaken. Both suggest that this may involve the lender in providing the lawyer with such financial information as is sufficient to meet these obligations. A lender's knowledge that no such information has been given to the lawyer may provide evidence of unreliability of the certificate. The advice needs to extend to an explanation that the lawyer's role is to provide a safeguard against undue influence. The one significant difference between the two cases in this area is that under Etridge, there should be direct communication by the bank to the guarantor to ascertain the name of her solicitor and to explain the process and that its purpose is to prevent her from disputing that she is legally bound by the documents once she has signed them.

There are advantages to having a broad test of when a lender will be implicated in any wrongdoing of the debtor, such as Lord Nicholls' test by which the mere fact of a non-commercial relationship between guarantor and debtor will give lenders notice of undue influence. It is "simple, clear and easy to apply"81 and avoids any need for lenders to probe emotional relationships. Furthermore, there was no way of establishing any other rational cut-off point, given the inability to categorise human affairs according to the risk of undue influence. Certainly, the test established in Wilkinson does little to identify those who are in actual need of protection.

At the same time, as was acknowledged in Etridge, giving guarantees out of entirely natural motives is the norm. There is considerable irony in recognising

Webb, D "Legal Advice in Surety Transactions: A Duty Based Approach" (2001) 19 NZULR 259,263. Etridge, supra n 11, 813.

262 Otago Law Review (2006) Vol 11 No 2

this yet at the same time expanding the operation of constructive notice. Lenders can be expected to require legal advice whenever the "non-commercial relationship" test is satisfied, despite its being redundant in most situations. Lenders effectively gain insurance to protect themselves against the consequences of a debtor's wrongdoing, at the expense of generally innocent borrowers and their guarantors. Of course, if the debtor is innocent and there is no presumption of wrongdoing, then the absence of legal advice can not be seized upon as sufficient to allow the guarantee to be set aside. One possible outcome of this reduction in the vulnerability of lenders is that they may be more prepared to take the risk of undue influence and not insist upon legal advice in all cases.

Of more fundamental concern however is, as the House of Lords recognised, legal advice is not always going to be effective in emancipating a guarantor from influence. While it may well counter an over-enthusiastic borrower or correct misrepresentations, the curious outcome of Etridge is that it is of least protection to the most vulnerable, those like Mrs Snee and Mrs Wilkinson for whom the legal advice could do no good. By following the designated ritual, lawyer's certificates are accorded talismanic significance. While the law insists upon incapacity being legally irrelevant unless known by the other party, there does not appear to be any solution to this particular problem. No test for when a lender ought to be suspicious as to the possibility of undue influence can do anything to resolve it because satisfying the test only requires the lender to take reasonable steps to allay the suspicions. In an ideal world, lenders would discuss concerns relating to undue influence with potential guarantors and only proceed with the transaction if it became reasonable to believe it was safe to do so. Banking practice, however, is to have guarantors deal with the bank through their lawyers.

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