The House of Lords recently handed down its much anticipated judgment in Royal Bank of Scotland v Etridge (No. 2)  UKHL44, clarifying the English law regarding lending bank’s duty towards a wife putting up surety for her husband. The decision extends what was previously required by a bank in this type of transaction, and provides a number of practical suggestions to banks on how to avoid a claim of undue influence. In light of the Yerkey v Jones, Amadio and Garcia line of authority in Australia, the decision will be of great interest to Australian lenders.
The English Court of Appeal was asked to consider whose responsibility it was to independently advise a wife providing security for her husband’s business debts. Essentially, the Court found that, provided the wife was represented by a solicitor in her dealings, the bank had no further obligations to her and was entitled to assume that the wife had been properly advised and could ordinarily resist a claim of undue influence. As a result, the responsibility for ensuring that the wife entered the transaction of her own free will and not under the undue influence of her husband clearly lay with the solicitor rather than the bank.
Their Lordships, however, disagreed with the Court of Appeal’s analysis on a number of key points, and as a result have now shifted this balance of responsibility back to the banks. Their Lordships held that a bank which is put on inquiry as to the possibility of undue influence being exerted over a wife (which they stated will almost always be the case in a husband-wife relationship) will be required to make a more concerted effort to ensure that the wife obtains good independent legal advice. This will require a bank to adopt the following procedures.
The bank should insist that the wife attend a private meeting with the bank’s representative where the extent of her liability and the risks involved in giving the guarantee are explained.
The bank should ensure that the wife has a solicitor acting for her, and should check who the solicitor is.
While the wife may use the same solicitor as her husband, the bank should urge the wife to obtain independent legal advice, and in some exceptional circumstances should insist on the wife being separately advised.
The bank should inform the wife of the need for a solicitor’s certificate and, in the spirit of full disclosure, should inform her that the bank requires the certificate to prevent her from disputing the guarantee.
The bank should provide the wife’s solicitor with financial information in respect of the husband’s account, including the current indebtedness, the purpose and nature of the new facility and copies of any application forms completed by the husband.
The bank will need to obtain the husband’s consent before providing this information, and if that consent is not forthcoming the transaction should not proceed.
Their Lordships did however acknowledge that whilst the solicitor advising the wife would be required to give a full explanation of the contents of all relevant documents and the nature of the guarantee, ultimately it was a matter for the wife to decide whether she wished to proceed with the transaction.
English decisions in this area of the law have had relatively little impact in Australia. However this is a major decision of the House of Lords, and judges in Australia are likely to pay attention to it. Accordingly, banks and other lenders should ensure that their procedures comply with the detailed statement of precautionary requirements listed by the House of Lords.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
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