Royal Bank of Scotland v Etridge (No 2)

Legal Case Summary

Royal Bank of Scotland Plc v Etridge (No. 2) [2002] UKHL 44

Undue influence; married couple; notice of risk; protection of wife and lender

Facts

The case concerned eight joined appeals in which homeowners had mortgaged their houses to secure loans used by the husbands for their respective businesses. The wives had no direct benefit. The businesses failed and the bank wanted to take possession of the homes.

Issue

The wives all claimed to have been unduly influenced by their respective husbands to sign the security agreement. Thus, the wives wanted the agreements to be declared void over their respective shares of the home’s equity – thereby avoiding repossession.

Decision/Outcome

The House of Lords explained that banks are obliged to make sure that their clients (i.e. the wives as well) obtained independent legal advice, especially if, in the case of a couple transacting for security over their matrimonial home, the loan would only benefit one person. The bank is “put on inquiry” to watch out for undue influence or misrepresentation in such cases. The entrusted solicitor should express full satisfaction that both persons gave a fully informed consent – e.g. he/she should meet the wife (the surety) in private, without the husband’s (the beneficiary) presence to discuss the planned loan. Once the solicitor certifies free consent, the bank’s security is protected by the presumption of ‘expression of … free will’. The Court also held that the claim of manifest disadvantage should be replaced by the milder ‘calls for explanation’ type of requirement (e.g. why a wife would agree to a loan solely benefiting her husband). The bank cannot be held liable for deficient legal advice (unless it believes the advice was incorrect). All in all, if the bank ensures independent legal advice and is assured of informed consent, it can repossess the property the loan was secured against.