The current credit environment has become increasingly challenging for individuals and businesses seeking to borrow money. It is more and more common for lenders to seek various forms of security such as guarantees or charges over property.
Sometime lenders take guarantees from the spouse or partner of a borrower, or will take a mortgage or charge over the matrimonial home. Lenders can run into difficulties where attempting to enforce such securities against the guarantor. For example, if a husband exercises undue influence on his wife or misrepresents the truth to convince her to provide a guarantee or to use their home for collateral, then the courts are likely to set aside the transaction and the security may be unenforceable.
Husband and Wife Guarantees - Early Analysis
The scenario outlined above is one that has existed for a considerable time. Formerly, courts would consider whether or not a bank had entrusted to the husband the signing of the relevant document by the wife. In those circumstances the husband would be considered an agent of the bank meaning that the bank was also responsib le for his undue influence or misrepresentation.
If the bank had not relied upon the husband for execution of the document then it was not under an obligation to ensure that the wife was separately advised nor was it affected by any misrepresentation or undue influence of the husband.
Barclays Bank plc v O'Brien
The courts' approach changed significantly in 1993 following the ruling in Barclays Bank plc v O'Brien which placed an obligation upon banks to take "reasonable steps" to ensure that an affected third party understood the risks of a transaction.
The court moved away from the question of agency and looked instead at whether the equitable doctrine of notice could be applied. It suggested that where a bank had actual or constructive notice of a wife's (or another party without a business interest in the transaction) equitable interest in a home for example, it was under a duty to inform that party of the risks associated with the transaction and recommend independent legal advice. If the bank failed to do so and it was found that a husband (or partner) had exercised undue influence, misrepresented the truth or committed some other legal wrong then the transaction could be set aside. The wife's equitable claim against her husband would be enforceable against the bank.
This remains the current position and it applies to any co-habiting situation where there is an emotional relationship of trust. It also applies to other relationships of trust such as a solicitor who has a debt guaranteed by a client.
Rollingsons has lawyers experienced in helping both individuals and businesses with their banking-related matters, including the resolution of disputes which may arise; if you would like more information please contact James Crighton (JCrighton@rollingsons.co.uk) via e-mail or by phone on 0207 611 4848.