Barclays Bank Plc v O’Brien[ 1994] 1 AC 180 PDF

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Barclays Bank Plc v O’Brien [1994] 1 AC 180, House of Lords Facts O’Brien heralded a two-stage process that can be applied to set aside the obligations of a surety to a loan and the lender. It settled the first stage as requiring misrepresentation or undue influence over the surety by the principal debtor such that the transaction could be set aside as between those parties (and note that fraud should also be sufficient). The second stage is that, applying a variant of the doctrine of notice, the lender could be affected by the wrongdoing such that the transaction between the lender and the surety could be set aside. Mr and Mrs O’Brien were married and jointly owned a family home. It was mortgaged to Barclays Bank. Mr O’Brien’s business needed credit, so he, as principal debtor, secured an increase in his overdraft with the same bank secured on, inter alia, the family home. Since Mrs O’Brien was a co-owner, she had to agree and she did agree to be a surety. The new overdraft limit was to settle at £120,000 and this was the extent of that second mortgage. But Mr O’Brien had falsely represented to his wife that the liability would be limited to £60,000 and last only three weeks. The documents were sent to another branch of the bank with instructions that both O’Brien's were to be fully appraised of their liabilities. Unfortunately, that branch allowed Mr O’Brien to sign alone, with Mrs O’Brien signing a day later. She was not given any explanation of the effect of the second mortgage. Mr O’Brien’s company exceeded its overdraft limit and the bank moved to enforce its security. Mrs O’Brien’s defence was that her husband’s undue influence or misrepresentation meant that the security could not be enforced. At first instance, the claim based on undue influence failed, but the misrepresentation was held to be actionable. However, it was said that the bank could not be held responsible for Mr O’Brien’s wrongdoing. Decision The Court of Appeal allowed the appeal. Dismissing the further appeal, the House of Lords took the opportunity to restate the applicable law, which was in poor condition (at 195). The Court of Appeal had decided the case on the basis of what was called the ‘special equity theory’ (from 187). This was based on the proposition that equity treated married women ‘more tenderly’ than others. Accordingly, a special duty arose that fixed upon the lender. This was rejected by the House of Lords. Also rejected was a proposition that if a person makes a large voluntary donation (such as becoming a surety), the

beneficiary has a burden of showing it was made fairly and honestly (at 193). The House also rejected as artificial the proposition that the principal debtor was an agent of the lender and that is why the lender was affected by the wrongdoing (at 194). Instead, the relevant rules fitted within the existing compartments of equity as described above. In the first compartment, for undue influence, there are two options. One has the option of proving actual undue influence where undue pressure was in fact exerted (although there is no need to show it caused the surety to agree), or to raise the presumption of undue influence and for it not to be rebutted. Presumed undue influence can be raised in two ways: either when the parties are in a specified relationship (excluding marriage) or if the surety reposed trust and confidence in the principal debtor. Then there is another requirement that the transaction must call for explanation as inexplicable by the ordinary motives of the relationship (from 189). The second step is to determine whether the third party has notice of the wrongdoing. Lord Browne-Wilkinson held that this would be so if the transaction were on its face not to the advantage of the surety; and, if so, reasonable steps were not taken to satisfy the lender that the agreement was properly obtained. This meant advising the surety of this risk and advising her to take independent advice. While the requirement would differ depending on the facts of the case, a private meeting between lender and surety in the absence of the principal debtor would usually do. If the lender was aware of circumstances such that suggested probable wrongdoing, more would be required and then the lender should insist the surety be independently advised. Only if there is notice, can the transaction be set aside as against the lender (from 191). Comment The modernising shift by the House of Lords was palpable. Lord Browne-Wilkinson noted the change in social attitudes towards an equal role for women and particularly how it is now commonplace for married women to co-own the family home (from 188). He also noted that practice does not always accord with the ideal of non-subservience and that some women still leave such decisions to their husbands. Nonetheless, in rejecting the special equity theory, Lord Browne- Wilkinson rationalised it as merely an application of the facts. Those in a sexual and emotional relationship were more likely to repose trust and confidence in their partners and, if so, this would lead to a presumption of undue influence.

Moreover, he argued that limiting the law’s protection only to wives would exclude other groups such as cohabitees and same sex couples. This rationalisation also avoids patronising strong wives who are not so influenced. The key operational issue is the need for a fair balance between surety and lender. If lenders do not lend, this is problematic for businesses and individuals: But the law not protecting vulnerable persons is problematic too. Lord Browne-Wilkinson thought he set a fair balance. All that was required beyond what was in the Code of Banking Practice (adopted around a year before O’Brien was heard at final appeal) was a personal interview with the surety in the absence of the principal debtor (from 197). Finally, note two significant developments. Soon after, in CIBC Mortgages plc v Pitt [1994] 1 AC 200 (HL), it was acknowledged a joint debtor could not rely on this protection because the transaction would be fair on its face. Only sureties could. Then, in Royal Bank of Scotland Plc v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773, the House firmed up the steps a lender would need to take. It is now necessary for the lender to confirm separate advice was given to the surety in the absence of the principal debtor. Wider Questions O’Brien represents a shift in basis to modern attitudes, which is surely welcome. However, one may question the way it operates. The extent to which the transaction was set aside was not challenged in the House of Lords. The Court of Appeal decided it could be set aside save for what Mrs O’Brien expected to be liable for, i.e. £60,000, rather than entirely. Yet, as argued in TSB Bank Plc v Camfield [1995] 1 WLR 430 (CA), but for the misrepresentation the surety would not have agreed at all, and therefore in that case the transaction was set aside entirely. Is it fair that the surety will escape all liability despite having agreed to some? This is but one of many satellite issues; see, e.g., O’Sullivan (2002) 118 LQR 337 for more. See Ferguson (1995) 111 LQR 555 for an alternative solution to this problem. A case of undue influence where the facts do not quite fit the compartments is Credit Lyonnais Bank Nederland NV v Burch [1996] EWCA Civ 1292; [1997] 1 All ER 144, Court of Appeal (and see the note in Essential Cases). There it was suggested that the doctrine of unconscionable bargains should apply. Would it therefore not be better to impose a duty, albeit one less archaic than the special equity theory, over the bank that would not be so rigid in its application?...