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Case No: CCRTF 2000 0531 B3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EPSOM COUNTY COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 19-10-2000
B e f o r e :
LORD JUSTICE KENNEDY
LORD JUSTICE WALLER
and
LORD JUSTICE JONATHAN PARKER
- - - - - - - - - - - - - - - - - - - - -
|
MRS
BARBARA ANN LEGGATT & Anor
|
Appellant
|
|
-
and -
|
|
|
NATIONAL
WESTMINSTER BANK
|
Respondent
|
- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr Roland Higgs of Counsel (instructed by Georgiou Nicholas) appeared on
behalf of the Appellant
Mr David Wolfson of Counsel (instructed by Denton Wilde Sapte) appeared
on behalf of the Respondent)
- - - - - - - - - - - - - - - - - - - - -
JUDGMENT
As Approved by the Court
Crown Copyright
LORD JUSTICE JONATHAN PARKER:
Introduction
1. This is an appeal by the second defendant in the action, Mrs Barbara Ann
Leggatt, against an Order made by His Honour Judge Hull QC in the Epsom County
Court on 7 March 2000. Permission to appeal was granted by Peter Gibson LJ
on 11 May 2000.
2. By his Order, Judge Hull QC made an order for possession of property known
as 7, Woodlands Park, Boxhill Road, Tadworth, Surrey, on the application of
National Westminster Bank plc as chargee under a Legal Charge dated 13
September 1990 ("the 1990 Charge"). The property is the matrimonial home of
Mrs Leggatt and her husband Mr Brian Leggatt and is registered in their joint
names. Mr Leggatt is the first defendant in the action. He has not served an
appellant's notice, and is not a party to this appeal. Mrs Leggatt appears by
Mr Roland Higgs of counsel; the Bank by Mr David Wolfson of counsel.
3. The 1990 Charge is expressed to secure all the liabilities to the Bank of a
partnership in which Mr Leggatt was then a partner, known as Brian Leggatt
Partnership ("the Partnership"). The Partnership, which was formed in 1974
between Mr Leggatt and a Mr Jiggins, carried on business as civil engineers.
At no time was Mrs Leggatt a partner in, nor was she at any time employed by,
the Partnership.
4. Mrs Leggatt's Defence to the Bank's claim to enforce the 1990 Charge is
based on the decision of the House of Lords in Barclays Bank plc v. O'Brien
[1994] 1 AC 180. Mrs Leggatt alleges (1) that at all material times there
existed a relationship of trust and confidence between herself and Mr Leggatt;
(2) that entering into the 1990 Charge was manifestly disadvantageous to her;
(3) that in the circumstances it is to be presumed that she entered into the
1990 Charge by reason of undue influence exercised over her by Mr Leggatt; (4)
that she was induced to enter into the 1990 Charge by misrepresentations made
by the Bank to solicitors instructed to give her independent advice (such
misrepresentations being adopted by Mr Leggatt); (5) that had the solicitors
advised her as to the true effect of the 1990 Charge and the liability it was
securing she would not have entered into it; (6) that she accordingly has a
right as against Mr Leggatt to have the 1990 Charge set aside; and (7) that the
Bank took the 1990 Charge with constructive notice of her right to have it set
aside and accordingly subject to that right.
5. The Judge rejected that Defence; the issue on this appeal is whether he was
right to do so.
The factual background
6. I now turn in more detail to the factual background, as admitted or
as found by the Judge.
7. Mr and Mrs Leggatt were married in 1971. In July 1972 they bought 7,
Woodlands Park in their joint names, with the aid of a mortgage from a third
party. They have since lived there as their matrimonial home. On 4 October
1972 they granted an unlimited second Charge over the property in favour of the
Bank ("the 1972 Charge").
8. The 1972 Charge defined Mr and Mrs Leggatt together as "the Mortgagor".
Clause 1 of the 1972 Charge provided that the expression "the Mortgagor" was to
be construed as referring to both or to either one of them and that their
liabilities under the charge were to be joint and several. Clause 2(a) of
the 1972 Charge provided that the charge was to be a continuing security for
all present and future indebtedness of "the Mortgagor" to the Bank and (by
subparagraph (ii)):
".... all other liabilities whatsoever of the Mortgagor to the Bank, present
future actual or contingent."
9. The 1972 Charge was endorsed with a certificate by a solicitor in the
following terms:
"I certify that I explained the terms of this deed to [Mrs Leggatt] and she
appeared to understand its contents."
10. In July 1974 Mr Leggatt formed the Partnership with Mr Jiggins.
11. On 31 August 1976 Mrs Leggatt signed an unlimited Guarantee in favour of
the Bank, guaranteeing all liabilities of the Partnership to the Bank.
12. The Partnership was a commercial success, and provided Mr and Mrs Leggatt
with their main, if not their only, source of income.
13. In about mid-1986 the Bank formed the view that the 1972 Charge was
"unsuitable for the purposes of securing the liabilities of the Partnership" (I
quote from an internal memorandum of the Bank), since it did not refer
specifically to such liabilities. It seems that there was another form of
charge in use by the Bank which referred specifically to partnership
liabilities, and the Bank took the view that the 1972 Charge should be replaced
by a charge in that form. Accordingly in June 1986 the Bank contacted Mr
Leggatt and advised him that a replacement charge in that form would be
required. In the event, however, the matter was not pursued at that stage,
and the 1972 Charge remained in place.
14. In June 1988 the Partnership's borrowings exceeded its then overdraft
facility of £65,000 by some £17,500. Shortly thereafter a number of
cheques drawn on the Partnership account were dishonoured. In January 1989
the Partnership's overdraft facilities were increased to £90,000. During
the period from June 1988 until May 1990 the Partnership exceeded its overdraft
facilities on a number of occasions. On 8 January 1990 the Bank wrote to the
Partnership granting additional overdraft facilities. In the course of that
letter, under the heading "Security", the Bank said this:
"The existing security position remains unsatisfactory. We still require
insurance cover of at least £75,000 on each partner to cover first death.
Additionally, it has come to our attention that [the 1972 Charge] only secures
their joint liabilities. We shall require the execution of a Charge Form to
secure the Partnership liabilities additionally. This matter will be taken
forward in the next few weeks."
15. In a further letter to the Partnership dated 19 January 1990 the Bank
repeated the above paragraph.
16. An internal report on the Partnership account by the Bank dated 4 June
1990 refers to the 1972 Charge as "not relied upon". The report records that
the profitability of the Partnership was being consistently demonstrated, but
that there was a capital deficiency of about £23,000. The report goes on
to comment:
".... the lending here has not been regarded as fully secured in view
of the fact that .... half of the security (i.e. that given by Brian Leggatt)
is deficient. At present, we hold Form NWM1015 dated 4 October 1972 from Brian
Leggatt and his wife, under which Bank valuation as at March 1986 amounted to
£80,000. The Charge was originally looked to as security because the
liability of Mrs Leggatt was tied in by way of guarantee but (quite rightly)
Hyde Park Area declined to accept this position as satisfactory.
It has been said, however, that this deficiency in the security position
appears never to have been brought to the attention of the partners and now
that I have discussed it with him, they are quite happy to regularise the
Bank's security, which upon an updated basis (being obtained) will give the
Bank very ample cover for the liabilities."
17. In a further internal report dated 12 June 1990, Mr Webb, an assistant
manager, said this:
"We are in the process of trying [to] regularise the securities position on
this account. We presently hold a Guarantee signed by Mrs Barbara Leggatt in
favour of the Partnership liability. However, this was incorrectly supported
by an NWB 1015 signed by Mr & Mrs Leggatt over their property Highlands, 7,
Woodlands Park, Boxhill, Tadworth, Surrey. I have today written to Mr Leggatt
clearly outlining the securities position in order to obtain his confirmation
he is willing to proceed with the new security position."
The letter to which Mr Webb was referring was a letter dated 13 September 1990
to Mr Leggatt, which reads as follows:
" I understand you are prepared to provide a Mortgage over the above mentioned
property to cover the borrowing of Brian Leggatt Partnership from the Bank.
As the property is owned jointly by both you and your wife the Bank also
requires your wife's confirmation that she too is prepared to mortgage the
matrimonial home. We would therefore be grateful if you could sign and return
the enclosed letter as your authority for the Bank to disclose information to
your wife regarding the partnership.
If your wife is prepared to Mortgage the property the Bank will release its
existing Charge over the matrimonial home and also release the guarantee given
by Mrs Leggatt in favour of the Brian Leggatt Partnership. Once we have
received your wife's confirmation in this regard we will be in a position to
commence our security formalities.
We look forward to receiving your authority shortly."
Enclosed with the letter dated 13 June 1990 was a letter dated 14 June 1990
from Mr Webb to Mrs Leggatt, with a space for a countersignature by Mr Leggatt,
together with a form of Charge, limited to £103,000. The letter
addressed to Mrs Leggatt reads as follows:
"I understand that you have agreed to provide a mortgage over your home to
cover the borrowing of Brian Leggatt Partnership from the Bank.
The Bank currently provides the following borrowing facilities to the Brian
Leggatt Partnership:
Loan £12,250
Overdraft £90.000
In addition to the Mortgage that you have agreed to enter into, the Bank
holds the following security:
Loan Mortgage from M A & C Jiggins
Over 59 High Beeches Banstead
Guarantee unlimited
From Mrs B. Leggatt
I enclose a copy of the Bank's form of Legal Mortgage. It is an important
legal document. Please read it carefully. Your liability will be limited to
£103,000 plus interest. You must consider if you are prepared to become
personally liable for this sum and to mortgage your home to the Bank. You may
wish to take professional legal advice in connection with this matter generally
and, in particular, as regards the terms of the Mortgage. The Bank recommends
that you seriously consider doing so. It would be clearly be advisable to seek
advice from someone who is not already advising the Partnership, but this is a
matter for you.
If you are prepared to Mortgage your property as outlined above the Bank will
release the Charge it already holds over your property dated 4 October 1972.
We will also release your Guarantee given to the Brian Leggatt Partnership
signed on 31 August 1976.
Please let me know if you are prepared to Mortgage your home to the Bank as
security for the liabilities to the Bank of Brian Leggatt Partnership. Your
signature to the Mortgage should be witnessed either by your Solicitor, in
which case please let me know his name and address, or by an officer of the
Bank."
18. In the event, Mr Leggatt did not countersign the letter and return it to
the Bank until more than two months later, and Mrs Leggatt said in evidence
that she had no recollection of having seen it. Certainly it is common
ground that the Bank never sent a letter in those terms direct to Mrs
Leggatt.
19. On 29 August 1990, following reminders from the Bank, Mr Leggatt wrote to
the Bank returning the letter dated 14 June 1990, which he had countersigned,
and suggesting the name of Messrs Gallyers Lightfoot Marchbanks as solicitors
to give Mrs Leggatt independent advice in relation to the proposed new
Charge.
20. The Bank took up Mr Leggatt's suggestion, and wrote to Gallyers Lightfoot
Marchbanks on 4 September 1990. The precise terms of this letter are central
to Mrs Leggatt's defence in this case, and I therefore set it out in full:
"We have been offered a legal charge over the aforementioned property in
support of an advance to be made to Brian Leggatt Partnership, our reliance on
the deeds being to the extent of £103,000.
As the deeds to the property are vested in the joint names of Mr and Mrs
Leggatt, it is appropriate that Mrs Leggatt receives the benefit of separate
legal advice, which, I understand, you are prepared to provide to her.
Accordingly, I shall be grateful if you will arrange for Mr and Mrs Leggatt to
call and sign the enclosed mortgage forms, one copy of which is for her
retention.
Please ensure that Mr and Mrs Leggatt acknowledge receipt of the copy form
where indicated on the mortgage form. Signature of the form should be
witnessed by the solicitor providing the separate advice.
Please return the mortgage form, duly executed and dated, to us as soon as
possible."
21. It is to be noted that the letter of instructions to the solicitors
mistakenly refers to the proposed charge as securing an advance "to be made"
to the Partnership, whereas the true purpose of the charge was to replace
the 1972 Charge and thus to secure existing, as well as future
borrowings of the Partnership. Mrs Leggatt accepts that the mistake was an
innocent one, but she categorises it as a misrepresentation by the Bank which,
she contends, effectively disables it from relying on the fact that she
received independent advice from the solicitors as an answer to the allegation
of constructive notice. Mrs Leggatt also relies for the same purpose on the
reference in the letter to the Bank "having been offered" the proposed
new charge, when the fact was that the Bank had asked for the charge.
22. On receipt of the letter of instructions, Mr Simon Gallyer (a partner in
the firm) wrote to Mr and Mrs Leggatt in the following terms:
"I understand from National Westminster Bank Plc, Kensington, Royal Garden
Branch that you wish to offer the Bank a Legal Charge over the above
property.
I have received the Form of Charge from the Bank and the Bank has requested
that I arrange for you to execute the Form of Charge in my presence,
particularly so that I can give Mrs Leggatt independent Legal Advice regarding
the importance and significance of the Form of Charge as I understand that the
Charge is being offered to support an advance being made to Brian Leggatt
Partnership.
I would therefore be grateful if you would telephone me to make a mutually
convenient appointment to attend my Office to execute the Legal Charge. I look
forward to hearing from you."
23. Mr Gallyer also wrote to the Bank acknowledging the letter of
instructions.
24. On 13 September 1990 Mr and Mrs Leggatt attended on Mr Gallyer, and Mr
Gallyer advised Mrs Leggatt about the proposed new charge. The Judge found
that Mr Leggatt was present throughout. Following the giving of advice by Mr
Gallyer to Mrs Leggatt, she and Mr Leggatt executed the form of Charge. Mr
Gallyer witnessed Mrs Leggatt's signature, writing against his own signature:
"having provided Mrs B.A.Leggatt with independent legal advice".
25. As at 13 September 1990 the total indebtedness of the Partnership to the
Bank was in the region of £103,000.
26. On 14 September 1990 Mr Gallyer returned the completed form of Charge to
the Bank, under cover of a letter in the course of which he said this:
"We confirm that we provided Mrs Leggatt with independent legal advice
regarding the Legal Mortgage and furthermore we handed to Mr & Mrs Leggatt
a completed copy of the Legal Mortgage and arranged for them to sign the
acknowledgement that they had received a completed copy."
27. In 1992 the Partnership became insolvent, and demands were made on Mr and
Mrs Leggatt under the 1990 Charge. The demands were not met, and the present
proceedings were commenced by the Bank on 23 June 1995. On 7 March 2000
Judge Hull QC made the Order for possession against which Mrs Leggatt
appeals.
Barclays Bank plc v. O'Brien [1994] 1 AC 180 and subsequent authorities
28. In Barclays Bank plc v. O'Brien, the House of Lords analysed the
legal and equitable basis upon which, and the circumstances in which, a
creditor will be fixed with constructive notice of a surety's equity to set
aside the contract of suretyship as against the principal debtor on grounds of
undue influence, misrepresentation or other legal wrong, so as to prevent the
creditor from recovering against the surety. The only speech was delivered
by Lord Browne-Wilkinson, with whom the remainder of their Lordships agreed.
In discussing undue influence, Lord Browne-Wilkinson adopted the classification
which had previously been adopted by this court in BCCI v. Aboody [1990]
1 QB 923. Class 1 in that classification comprises cases of actual undue
influence. Class 2 comprises cases of presumed undue influence. In relation
to Class 2 cases, Lord Browne-Wilkinson said:
"In these cases the complainant only has to show, in the first instance, that
there was a relationship of trust and confidence between the complainant and
the wrongdoer of such a nature that it is fair to presume that the wrongdoer
abused that relationship in procuring the complainant to enter into the
impugned transaction. In Class 2 cases therefore there is no need to produce
evidence that actual undue influence was exerted in relationship to the
particular transaction impugned: once a confidential relationship has been
proved, the burden then shifts to the wrongdoer to prove that the complainant
entered into the impugned transaction freely, for example by showing that the
complainant had independent advice. Such a confidential relationship can be
established in two ways, viz.,
Class 2(A)
Certain relationships (for example solicitor and client, medical advisor and
patient) as a matter of law raise the presumption that undue influence has been
exercised.
Class 2(B)
Even if there is no relationship falling within Class 2(A), if the complainant
proves the de facto existence of a relationship under which the complainant
generally reposed trust and confidence in the wrongdoer, the existence of such
relationship raises the presumption of undue influence. In a Class 2(B) case
therefore, in the absence of evidence disproving undue influence, the
complainant will succeed in setting aside the impugned transaction merely by
proof that the complainant reposed trust and confidence in the wrongdoer
without having to prove that the wrongdoer exerted actual undue influence or
otherwise abused such trust and confidence in relation to the particular
transaction impugned."
29. In the instant case, as is apparent from my summary of her Defence earlier
in this judgment, Mrs Leggatt alleges Class 2(B) undue influence.
30. Turning to consider the position of third party creditor banks, Lord
Browne-Wilkinson said this:
" Of course, if the wrongdoing husband is acting as an agent for the creditor
bank in obtaining the surety from the wife, the creditor will be fixed with the
wrongdoing of its own agent and the surety contract can be set aside as against
the creditor. Apart from this, if the creditor bank has notice, actual or
constructive, of the undue influence exercised by the husband (and consequently
of the wife's equity to set aside the transaction) the creditor will take
subject to that equity and the wife can set aside the transaction against the
creditor (albeit a purchaser for value) as against the husband: see
Bainbrigge v. Browne ( 1881 ) 18 Ch. 188 and Bank of Credit and
Commerce International S.A. v. Aboody [ 1990 ] 1 Q.B. 923, 973.
Similarly, in cases such as the present where the wife has been induced to
enter into the transaction by the husband's misrepresentation, her equity to
set aside the transaction will be enforceable against the creditor if either
the husband was acting as the creditor's agent or the creditor had actual or
constructive notice."
31. Later in his judgment, Lord Browne-Wilkinson said this, in relation to the
equitable doctrine of notice:
" In my judgment, if the doctrine of notice is properly applied, there is no
need for the introduction of a special equity in these types of cases. A wife
who has been induced to stand as a surety for her husband's debts by his undue
influence, misrepresentation or some other legal wrong has an equity as against
him to set aside that transaction. Under the ordinary principals of equity,
her right to set aside that transaction will be enforceable against third
parties (e.g. against a creditor) if either the husband was acting as the third
party's agent or the third party had actual or constructive notice of the facts
giving rise to her equity. Although there may be cases where, without
artificiality, it can properly be held that the husband was acting as the agent
of the creditor in procuring the wife to stand as surety, such cases will be of
very rare occurrence. The key to the problem is to identify the circumstances
in which the creditor will be taken to have had notice of the wife's equity to
set aside the transaction.
The doctrine of notice lies at the heart of equity. Given that there are two
innocent parties, each enjoying rights, the earlier right prevails against the
later right if the acquirer of the later right knows of the earlier right
(actual notice) or would have discovered it if he had taken proper steps
(constructive notice). In particular, if the party asserting that he takes
free of the earlier rights of another knows of certain facts which put him on
inquiry as to the possible existence of the rights of that other and he fails
to make such inquiry or take such steps as are reasonable to verify whether
such earlier right does or does not exist, he will have constructive notice of
the earlier right and take subject to it. Therefore where a wife has agreed to
stand surety for her husband's debts as a result of undue influence or
misrepresentation, the creditor will take subject to the wife's equity to set
aside the transaction if the circumstances are such as to put the creditor on
inquiry as to the circumstances in which she agreed to stand surety."
32. Lord Browne-Wilkinson continued (at page 196D):
"Therefore in my judgment a creditor is put on inquiry when a wife offers to
stand surety for her husband's debts by the combination of two factors: (a) the
transaction is on its face not to the financial advantage of the wife; and (b)
there is a substantial risk in transactions of that kind that, in procuring the
wife to act as surety, the husband has committed a legal or equitable wrong
that entitles the wife to set aside the transaction.
It follows that unless the creditor who is put on inquiry takes reasonable
steps to satisfy himself that the wife's agreement to stand surety has been
properly obtained, the creditor will have constructive notice of the wife's
rights.
What, then are reasonable steps which the creditor should take to ensure that
it does not have constructive notice of the wife's rights, if any? Normally
the reasonable steps necessary to avoid being fixed with constructive notice
consist of making inquiry of the person who may have the earlier right (i.e.
the wife) to see whether such right is asserted. It is plainly impossible to
require of banks and other financial institutions that they should inquire of
one spouse whether he or she has been unduly influenced or misled by the other.
But in my judgment, the creditor in order to avoid being fixed with
constructive notice, can reasonably be expected to take steps to bring home to
the wife the risk that she is running by standing as surety and to advise her
to take independent advice. As to past transactions, it will depend on the
facts of each case whether the steps taken by the creditor satisfy this test.
However, for the future in my judgment a creditor will have satisfied the
requirements if it insists that the wife attend a private meeting (in the
absence of the husband) with a representative of the creditor at which she is
told of the extent of her liability as surety, warned of the risk that she is
running and urged to take independent legal advice. If these steps are taken
in my judgment the creditor will have taken such reasonable steps as are
necessary to preclude a subsequent claim that it had constructive notice of the
wife's rights. I should make it clear that I have been considering the
ordinary case where the creditor knows that the wife is to stand surety for the
husband's debts. I would not exclude exceptional cases where a creditor has
knowledge of further facts which render the presence of undue influence not
only possible, but probable. In such cases, the creditor to be safe will have
to insist that the wife is separately advised."
33. In Royal Bank of Scotland plc v. Etridge (No 2) [1998] 4 All ER 705
("Etridge") this court laid down the principles to be applied in
determining whether a bank seeking to enforce a charge against a wife is able
to rely on the fact that the wife received legal advice before entering into
the charge to rebut the presumption of undue influence and imputed or
constructive notice, and whether the bank ought to have been put on inquiry to
ascertain whether the wife entered into the charge under her husband's undue
influence. Paragraph 36 of the judgment of the court in Etridge reads
as follows:
"The effect of the landmark decision of the House of Lords in O'Brien's
case is that, even so, the bank is put on inquiry by the combination of
two factors: (a) the transaction is not on its face to the financial advantage
of the wife; and (b) there is a substantial risk that, in procuring his wife to
guarantee or provide collateral security for his debts, the husband has acted
improperly. The risk which Lord Browne-Wilkinson identified is the risk that
one party has exploited the emotional pressure and trust which derive from
cohabitation whether inside or outside marriage. The result is that, where
condition (a) is satisfied, the bank is put on inquiry if, but only if, that
bank is aware that the parties are cohabiting or that the particular surety
places implicit trust and confidence in the principal debtor in relation to her
financial affairs."
34. Later in its judgment in Etridge (in paras 41-50), the court
considered the effect of legal advice given to the wife. Paragraphs 41 and 42
of the judgment read as follows:
"41. It is now settled law that the question whether the bank can exercise
its legal rights against the wife depends in the first instance on whether the
wife has an equity to set aside the transaction and in the second place on
whether, at the time it gave value, the bank had notice, actual imputed or
constructive, of the wife's equity. In relation to the first question, the
issue is whether the advice actually given was sufficient to rebut the
presumption of undue influence. In relation to the second, the issue is
different: it is whether, in the light of the facts known to the bank,
including the availability of legal advice, any risk of the wife having an
equity reasonably appeared to have been dispelled. The first question
depends on what actually happened between the wife, her husband, and the
solicitor. The second question depends on how the transaction appeared to
the bank.
42. Although these issues raise questions of fact, the structure of the
underlying transaction is so commonplace and the efficient funding of small
businesses is so dependent on its validity, that the parties, and in particular
the lending institutions, must be entitled to proceed in accordance with a
settled practice which is effective to secure the validity of the transaction
while at the same time affording the wife the protection of proper legal
advice. It is highly undesirable that the validity of such transactions
should depend on fine distinctions, particularly on distinctions in the wording
of the instructions to the solicitors or the certificates they give."
(Emphasis supplied.)
35. The court then referred to a line of authority which (it concluded)
established a number of propositions, which are set out in paragraph 44 of the
judgment. These propositions include the proposition that "the bank is
entitled to expect the solicitor to regard himself as owing a duty to the wife
alone when giving her advice"; that "the bank is entitled to rely on the fact
that the solicitor undertook the task of explaining the transaction to the wife
as showing that he considered himself to be sufficiently independent for this
purpose"; and that "the bank is not concerned with the sufficiency of the
advice".
36. Paragraph 49 of the judgment in Etridge reads as follows:
"While the bank is normally entitled to assume that a solicitor who is asked
to advise the wife will discharge his duties fully and competently, and that he
will not have restricted himself to giving an explanation of the transaction
and satisfying himself that she appears to understand it, it cannot make any
such assumption if it knows or ought to know that it is false: Burch's
case. If the bank is in possession of material information which is not
available to the solicitor, or the transaction is one into which no competent
solicitor could properly advise the wife to enter, the availability of legal
advice is insufficient to avoid the bank being fixed with constructive
notice."
37. In Barclays Bank plc v. Coleman [2000] 1 All ER 385 Nourse LJ
considered the authorities relating to the concept of "manifest disadvantage"
as a requirement of presumed undue influence (see the decision of the House of
Lords in National Westminster Bank v. Morgan [1985] AC 686). Nourse LJ
concluded that the disadvantage did not have to be large or even medium-sized;
it could be small, provided it was clear, obvious and more than de
minimis. Furthermore, the test of "manifest disadvantage" was an
objective one. Nourse LJ said (at page 400c-d):
"In deciding whether a transaction is manifestly disadvantageous, it is agreed
that an objective view must be taken as at the date at which the transaction is
entered into."
The judgment
38. The Judge heard oral evidence from Mr and Mrs Leggatt and from Mr Gallyer.
He found the evidence of Mr and Mrs Leggatt about the circumstances in which
the 1990 Charge was executed to be "profoundly unsatisfactory" (transcript p.12
lines 14/15). He continued:
"If that mortgage were not signed, then the Partnership business would
collapse; both of them knew that. The idea that it made some difference to Mrs
Leggatt's decision that the Bank had said that the charge was being offered to
the Bank in support of an advance to be made is, in my view, wholly unrealistic
and the product of wishful thinking by Mr and Mrs Leggatt, probably inspired
by Mr Rendall."
(Mr Rendall is a retired solicitor who assisted both Mr and Mrs Leggatt, and
who continued to assist Mr Leggatt after Mrs Leggatt was separately
represented.)
39. The Judge went on to observe that Mr and Mrs Leggatt's account of the
meeting with Mr Gallyer "almost passes belief". He continued (transcript p.12
line 24):
"During the whole period when it is alleged Mr Gallyer was advising Mrs
Leggatt on a wholly incorrect basis, Mr Leggatt sat quietly by never saying
anything about the true facts, namely that it was not a case of new borrowing
but offering a valid security for existing borrowing. Moreover, it must have
been obvious to both of them that, if Mrs Leggatt had refused to execute the
mortgage, the Partnership business would have collapsed and the Bank would have
insisted on repayment, probably trying to enforce its earlier security and, of
course the guarantee, and in any event issuing proceedings, obtaining a
judgment, and levying execution on the house. When this was pointed out to Mrs
Leggatt she stuck obstinately, and I am afraid disingenuously, to her story
that she would still not have signed."
40. As to the pleaded misrepresentations, the Judge said this (transcript p.14
line 10):
"I have been driven to the conclusion that the contentious parts of Mr and Mrs
Leggatt's evidence are unreliable and I regard the reliance on the two errors
in the Bank's letter as opportunistic, insincere, and entirely free from merit.
Indeed the reference to security being offered is no more than a banker's
euphemism or catch-phrase, which in my view means exactly the same as demanded
or requested in this context"
41. Notwithstanding that there was an issue on the pleadings as to whether the
1972 Charge was effective to secure Mr Leggatt's liabilities as a partner in
the Partnership, the Bank contending that it was effective to do so, the Judge
did not find it necessary to decide that issue. He concluded that even on the
basis that it was ineffective to do so it could not be said that the 1990
Charge was manifestly disadvantageous to Mrs Leggatt. He expressed himself
thus (transcript p.15 line 13):
" I am entirely satisfied that the 1990 mortgage was not to the manifest
disadvantage of Mrs Leggatt. So far from putting her home at risk, entry
into the mortgage was the only practicable way of preserving it if the Bank
continued to doubt the validity of the 1972 mortgage. There was no question of
extra borrowing, as Mr Leggatt knew perfectly well, even if Mrs Leggatt did
not. If Mrs Leggatt had refused to sign, then the disastrous consequences
that I have referred to already would in all probability have ensued."
42. The Judge found that Mr Gallyer had failed to advise Mrs Leggatt with
proper care, and that had he done so, and had he asked Mrs Leggatt the
questions which he should have asked her, he would have discovered the true
position in relation to the 1990 Charge (namely that it was intended by the
Bank to replace the 1972 Charge and was thus intended to secure existing
borrowings). However, the Judge went on to conclude that if Mr Gallyer had
fully acquainted himself with all the material facts (as he should have done),
his advice to Mrs Leggatt would have been no different; and that accordingly
the non-disclosure of the Bank's doubts as to whether the 1972 Charge covered
Mr Leggatt's liabilities as a partner in the Partnership had not caused her to
enter into the 1990 Charge.
43. The Judge accordingly rejected Mrs Leggatt's Defence, and made an order
for possession.
The arguments on this appeal
44. Mr Higgs (for Mrs Leggatt) submits that the Judge ought to have concluded
(a) that it was to Mrs Leggatt's manifest disadvantage to enter into the 1990
Charge, and (b) that by reason of the misrepresentations in its letter of
instructions to the solicitors, the Bank cannot be said to have taken
reasonable steps to satisfy itself that Mrs Leggatt's agreement to execute the
1990 Charge had been properly obtained - in other words, that it is disabled
from relying on the fact that Mrs Leggatt received independent advice from the
solicitors as defeating the allegation of constructive notice.
45. As to manifest disadvantage, Mr Higgs submits that the 1972 Charge was,
as a matter of construction, ineffective to secure Mr Leggatt's partnership
liabilities, with the consequence that, far from one charge being replaced by
another, the 1990 Charge had the effect of subjecting the matrimonial home to a
charge to secure liabilities which were not previously secured on it. In
any event, he submits, the Bank's doubts about the effectiveness of the 1972
Charge meant that in practice there must have been a real likelihood that,
whether or not those doubts were well-founded, the Bank would not have sought
to enforce the 1972 Charge in respect of Mr Leggatt's partnership liabilities;
and that this is a factor which is to be taken into account in assessing
whether or not it was to Mrs Leggatt's manifest disadvantage to enter into the
1990 Charge. Mr Higgs submits that when that factor is taken into account,
the conclusion follows that it was to Mrs Leggatt's manifest disadvantage to
enter into the 1990 Charge.
46. As to the effect of the alleged misrepresentations in the letter of
instructions, Mr Higgs was, I think, disposed to concede that the reference in
the letter to the Bank having been "offered" a charge is of no significance.
If he made that concession, he was certainly right to do so, in my judgment,
since there is plainly nothing in the point. At all events, Mr Higgs'
submissions were directed entirely to the reference in the letter to an advance
"to be made". He submits that the effect of this mistaken reference to a
future loan was to cause the solicitors to "take their eye off the ball", as he
put it, in that it effectively absolved them from having to conduct any
investigation into the past financial history of the Partnership; whereas had
the solicitors been told that the 1990 Charge was to secure an existing
indebtedness of some £103,000 they would have been concerned to
investigate how that indebtedness had come into existence and what prospect
there was of the Partnership being able to repay it.
47. Mr Wolfson (for the Bank) submits the Judge was right to conclude that it
was not to Mrs Leggatt's manifest disadvantage to enter into the 1990 Charge,
for the reasons he gave. Mr Wolfson submits that it is absurd to suppose
that, whatever its doubts as to whether the 1972 Charge was effective to secure
Mr Leggatt's partnership liabilities, the Bank would not have attempted to
enforce the 1972 Charge in respect of those liabilities had it needed to do so.
In any event, Mr Wolfson submits, the 1972 Charge was plainly effective
according to its terms to secure Mr Leggatt's partnership liabilities.
48. As to the reference in the letter of instructions to an advance "to be
made", Mr Wolfson points to the Judge's finding that even if the true position
had been explained to Mrs Leggatt, she would still have entered into the 1990
Charge. In any event, he submits, the Bank was entitled to assume that the
solicitors would discharge their duty to their client. Had they done so, they
must have discovered the true position (although, as the Judge concluded, their
advice to Mrs Leggatt would still have been the same). In the circumstances,
he submits, there is no basis for fixing the Bank with constructive notice.
Conclusions
49. As Lord Browne-Wilkinson made clear in Barclays Bank v. O'Brien (at
page 196D), where a wife stands surety - or, as in the instant case, provides
security - for her husband's debts, the creditor will be put on inquiry if the
transaction is on its face not to the financial advantage of the wife, with the
consequence that unless the creditor takes reasonable steps to satisfy himself
that the wife's agreement to enter into the transaction has been properly
obtained, he will have constructive notice of the wife's rights.
50. It follows in the instant case that if it was not on its face financially
disadvantageous to Mrs Leggatt to enter into the 1990 Charge, the Bank was not
put on inquiry and no question of constructive notice arises.
51. As noted earlier, the Judge concluded that even on the basis that the 1972
Charge was ineffective to secure Mr Leggatt's partnership liabilities, it was
plainly to Mrs Leggatt's advantage to replace it with the 1990 Charge, since
unless the 1990 Charge was signed the Partnership business would (as she knew)
collapse, and the Bank would then take steps to enforce her 1976 Guarantee. I
agree with that conclusion.
52. There is, however, a further factor which makes the position even clearer,
in my judgment; namely that, as I construe it, the 1972 Charge was clearly
effective according to its terms to secure Mr Leggatt's partnership
liabilities. As noted earlier, the 1972 Charge was expressed to secure "all
other liabilities whatsoever" of Mr or Mrs Leggatt to the Bank. In the face
of those clear and all-embracing words I cannot see any basis for implying some
limit on their scope. Mr Higgs made a valiant attempt to suggest that, in the
context of the low level of Mr Leggatt's borrowings in 1972, coupled with the
fact the Partnership was not then in existence, the 1972 Charge is to be
construed as limited in effect to their joint borrowings, alternatively their
personal borrowings; but in the face of the clear words of the deed such a
construction seems to me to be quite unsustainable.
53. Nor has any O'Brien point (if I may so describe it) been taken any
stage in relation to the 1972 Charge. This is, perhaps, not surprising in the
light of the solicitor's certificate to which I referred earlier in this
judgment.
54. Mr Higgs submitted that even if the 1972 Charge was in truth effective to
secure Mr Leggatt's partnership liabilities, nevertheless the subjective views
of the Bank on that question (albeit mistaken), leading to what he termed its
"disinclination" to rely on the 1972 Charge, are factors which are to be taken
into account in considering whether, viewing the matter objectively, the 1990
Charge was to Mrs Leggatt's disadvantage. However, even assuming (without
deciding) that it is legitimate to have regard for this purpose to the
expressed attitude of the creditor towards the enforcement of a security, I
agree with Mr Wolfson that in the instant case such doubts as the Bank had as
to the enforceability of the 1972 Charge would not have deterred it from taking
every possible step to enforce it had the need arisen.
55. I therefore conclude that the 1990 Charge was not on its face
disadvantageous to Mrs Leggatt. On the contrary, given the enforceability of
the 1972 Charge and the fact (found by the Judge) that unless the 1990 Charge
was signed the Partnership business would collapse, it was to her financial
advantage to sign it.
56. That conclusion is sufficient to dispose of this appeal, but in deference
to Mr Higgs' submissions I will turn briefly to the issue as to whether the
so-called misrepresentation in the letter of instructions to the solicitors
("an advance to be made") leads to the conclusion that the Bank cannot rely on
the fact that Mrs Leggatt was received independent solicitors' advice as
preventing it from having constructive notice of (presumed) undue influence on
the part of Mr Leggatt.
57. In this context, I bear in mind what this court said in paragraphs 41 and
42 of its judgment in Etridge, quoted earlier. In particular, I bear
in mind the last sentence of paragraph 42 of that judgment, where the court
observed that it was highly undesirable that the validity of commonplace
transactions should depend upon fine distinctions, particularly on distinctions
in the wording of instructions to solicitors.
58. For my part, I can see no basis in principle or authority for the
proposition that an immaterial inaccuracy in the letter of instructions to the
solicitors (immaterial in the sense that the Judge found that Mrs Leggatt would
have signed the 1990 Charge even if the true position had been disclosed to her
by the solicitors) should have the effect of saddling the Bank with
constructive notice. On the contrary, for the reasons explained by this court
in Etridge I can see every reason why it should not have that effect.
59. Nor can I accept Mr Higgs' submission that the inaccuracy had the effect
of somehow circumscribing the scope of the inquiries which the solicitors were
required to make. Whether the charge was to secure existing borrowings or a
fresh borrowing, the solicitors, if they were to discharge their duty to their
client (Mrs Leggatt) properly, would need to inquire into the financial history
of the partnership in order to form a view as to the risks of the charge being
enforced. In the circumstances, the fact that (on the Judge's findings) they
signally failed to discharge their duty to Mrs Leggatt cannot, in my judgment,
be laid at the door of the Bank.
60. For the reasons which I have attempted to express, therefore, I would
dismiss this appeal.
Lord Justice Waller:
63. I agree.
Lord Justice Kennedy:
64. I also agree.
Order: Appeal dismissed with detailed assessment of costs.
(Order does not form part of approved judgment.)
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