Lloyd's Maritime and Commercial Law Quarterly
TAKING SECURITY AFTER O’BRIEN
Richard Hooley*
In Barclays Bank Plc. v. O’Brien the House of Lords clarified the circumstances in which a wife who stands surety for her husband’s debts may rely on his undue influence or misrepresentation to resist liability to a creditor under a mortgage, charge or guarantee. Much turns on whether the creditor has taken reasonable steps to satisfy himself that the wife’s agreement to stand surety has been properly obtained. The nature of the steps a creditor should take have now been considered by the Court of Appeal in four recent cases. This article analyses those decisions and concludes that they may have unwelcome consequences for both the creditor and the wife’s legal adviser.
Introduction
As commercial lenders strive to adopt watertight procedures for taking security, and thereby reduce the risk of that security later being set aside by the courts, they will have welcomed the guidance given by the House of Lords in Barclays Bank Plc. v. O’Brien
1 as to the steps a lender should take when taking security from a wife who stands as surety for her husband’s debts.2 The classic scenario is where a wife is induced by her husband’s undue influence or misrepresentation to execute a mortgage or charge over the matrimonial home to secure a loan from a bank to her husband or his business. According to O’Brien, where the bank is put on enquiry as to the circumstances in which the wife agreed to stand surety, it must take reasonable steps to satisfy itself that her agreement to stand surety has been properly obtained. Unless the bank complies with this requirement, it will be fixed with constructive notice of the wife’s right to have the transaction set aside against her husband and run the risk of its security later being set aside.3 By stating the law in this way the House of Lords sought to strike a fair balance between, on the one hand, the need to protect the vulnerability of the wife who relies implicitly on her husband and, on the other hand, the practical problems of financial institutions asked to accept secured or unsecured surety obligations from the wife for her husband’s debts.4 Above all,
* Fellow of Fitzwilliam College, Cambridge.
1. [1994] 1 A.C. 180; noted Berg [1994] LMCLQ 34.
2. The guidance also applies to certain other sureties, e.g., where there is an emotional relationship of cohabitation between the surety and the principal debtor, or the surety reposes trust and confidence in the principal debtor in relation to his or her financial affairs: ibid., 198C-F. This article concentrates on the position of wives and banks, but much of it also applies to these other sureties and other types of creditor. See generally, Cretney, “Mere Puppets, Folly and Imprudence: Undue Influence for the Twenty-First Century” [1994] Restitution Law Review 3.
3. In T.S.B. Bank Plc. v. Camfield [1995] 1 W.L.R. 430, a misrepresentation case, the Court of Appeal recently held that the security will be set aside in its entirety.
4. [1994] 1 A.C. 180, 197D-E.
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