Presumed undue influence; undue influence and third parties
For undue inﬂuence to be presumed, there must be
a) a relationship of trust and conﬁdence
b) the transaction must be one that calls for an explanation
The wife argued that the bank had constructive notice of her husband’s undue inﬂuence and so should not get possession of the house. This argument failed because the solicitor acting for Mrs Etridge had conﬁrmed to the bank, in the event falsely, that he had advised her about the content and effect of the charge. The bank was entitled to rely on the solicitor’s conﬁrmation and there were no further steps that the bank could reasonably have been required to take.
The House of Lords conﬁrmed that if the creditor had actual or constructive notice of the debtor’s undue inﬂuence then the security contract obtained as a result would be voidable.
The House of Lords also stated that a creditor will have constructive notice if:
a) it ought to have been put ‘on inquiry’
b) did not take reasonable steps
to ensure that the surety was aware of the implications of what she was signing.
The House of Lords discussed the circumstances in which a creditor would be put ‘on inquiry’ and the sort of reasonable steps it should take to protect itself where it had been put on inquiry about the risk of undue inﬂuence.
- put on inquiry
Bank should be regarded as put on inquiry in every case where the relationship between a surety and debtor is non-commercial (except where money is being advanced to husband and wide jointly- CIBC Mortgages)
- Reasonable steps
The bank can satisfy the requirement to take reasonable steps if it insists that the wife attend a private meeting with a representative of the bank at which she is:
- - told of the extent of her liability as surety;
- - warned of the risk she is running; and
- - urged to take independent legal advice.
Alternatively, Lord Nicholls said that banks ought not to be compelled to have a meeting with the surety and it is not unreasonable for the banks to prefer that the task is undertaken by an independent legal adviser. Therefore, a letter of confirmation from a solicitor
should suffice (as in Etridge)