Where a borrower (A) takes a loan from a bank (B), which is guaranteed and secured by a person (C) in a close emotional or family relationship with A, it is now established that B will need to ensure that C is advised by a solicitor about the key features of the transaction C is entering into; otherwise, B will be fixed with constructive notice of any undue influence, misrepresentation or other “wrongdoing” that C establishes A engaged in. As the House of Lords decided in Royal Bank of Scotland Plc v Etridge (No 2),1 the bank’s security will be vulnerable to legal challenge where it knows that the relationship between A and C is non-commercial and it fails to take the recommended step of ensuring that C is independently advised. Etridge was a clarification and restatement of the law laid down by the House of Lords in the earlier case of Barclays Bank Plc v O’Brien.2 Clarification was necessitated by the following passage in the speech of Lord Browne-Wilkinson, with whom the other members of the appellate panel agreed, in O’Brien:3

In some post-O’Brien cases it was thought that the court had to decide whether the specific transaction entered into by the parties was not on its face to the wife’s advantage and that there was some independent evidence apart from the transaction’s being a suretyship agreement that indicated wrongdoing by the husband. Etridge clarified that suretyship transactions inherently presented these risks so that independent advice would always be required regardless of the individual circumstances of the case. Lord Browne-Wilkinson was not laying down criteria to be applied by the court; he was explaining the rationale for the legal rule the House of Lords was establishing. Lord Browne-Wilkinson also stated that the rule applied not just to wives but to other relationships as well, and in Etridge this was expressed as the borrower-surety relationship’s being non-commercial.

In CIBC Mortgages Plc v Pitt,4 heard and determined at the same time as O’Brien, the House of Lords decided against applying the O’Brien “invalidating tendency” to cases where a secured loan was made to husband and wife jointly. It was argued that these transactions are not always as they appear. The same risk of undue influence or other wrongdoing by one borrower against the other arose in these situations as well, so that it would be appropriate to place the same onus on the bank to have each borrower