Commercial Lenders Law

The law of Undue Influence is undoubtedly disconcerting to lawyers and commercial lenders as it offers one party an equitable right to have a transaction set aside. Should the Court find UI at hand, the contract shall be voidable and recission will apply. UI amounts to some form of conduct that is capable of influencing or clouding the judgement of another so they can no longer be validly said to consent to that which they sign. There are two categories of UI. Actual UI is influence expressly used by the defendant for a purpose, while the more common presumed UI is influence presumed to exist on the basis of the relationship between the parties.

In 2001 during RBS v. Etridge in the HOL, eight similar appeals were heard where the wife had charged her interest in the family home as security for her husband's debt or the debt of a company through which he carried out business. In the financial climate of today, society now views this transaction as well documented and common place, it is normal. As such, during Etridge new guidelines were established which state the precautions that should be taken by commercial lenders to prevent mortgages being set aside by a co-signatory to. The case highlighted that a lender is no longer to be put on notice of the relationship between the signatory and the beneficiary simply because they are husband and wife. Instead, the test for whether the lender should be put on notice now appears to be whether: the transaction does not appear to be of financial advantage to the wife; and, there is a substantial risk in procuring the wife to act as surety that the husband has committed a legal or equitable wrong that may entitle the wife to have the transaction set aside. Whereas prior to Etridge, a wife could raise a presumption against her husband that UI had been used simply by establishing the requisite relationship between them, there is now the additional requirement that the transaction she guaranteed was also of a type involving some “manifest disadvantage” to her. The approach taken was that the bank should not be affected by the wife's favourable position in equity unless they were put on notice by the transaction itself.

Additionally, the Court looked at the role played by commercial lenders and lawyers in such transactions. Lord Nicholls recognised that in none of the appeals had the bank arranged for any of its staff to meet with any of the wives privately, from this he surmised it was not the practice of banks to do this. Yet he regarded this as acceptable, provided the bank had taken "reasonable steps to satisfy itself that the wife has had brought home to her in a meaningful way, the practical implications of the proposed transaction”. The Etridge lending protocol was established, this introduced safe-guard provisions which must be satisfied by the commercial lender to negate them from being fixed with constructive notice of the UI. The first provision asks for the transaction to be explained in full, secondly the lender must ask who is acting on the surety's behalf (name of solicitor), then finally the lender is required to seek confirmation from the solicitor that the surety has been advised about the nature and risks contained within the transaction. Controversially, if the advice given is inadequate, the blame will shift from the bank to the solicitor directly who may become liable in a Court of law.

Auchmuty states the current law relating to UI flows from a judicial view that the formal legal equality of women “obviates any need for special equitable protection”, which she expands upon in her article “Men Behaving Badly: An Analysis of English Undue Influence Cases”. As she reports, UI has been a major issue in mortgage cases since the early 1900s in English land law, the law reports are strewn with cases of bad behaviour by both male solicitors and male banking officials which the Courts have allowed to go unchecked. Auchmuty considers “This is because men's bad behaviour is this area is taken for granted in our society”. The law has been said to overlook and excuse such behaviour, from claiming the neutrality of legal and equitable doctrines and the role of equity towards women, to pretending balance exists where in fact there is none. Auchmuty alleges that by moving the focus of the law from any wrong at hand to the method in which commercial lenders can avoid being affected, is evidently prejudicial against women. She concludes that the UI test is “manifestly unsuitable” to protect women as equity appears more concerned with shielding the business interests of major commercial lenders. “While there are some recent and welcome signs of legal engagement with the problems of masculinity, the solutions to women's problems lie largely outside law, in women's greater financial independence and a realignment of the relationship between men and women”. The “equality” brought up in the question is said to be lacking in not taking into account the wrongs that have been perpetrated on women and the daily domestic and social surroundings they contend with, the “special tenderness” of equity appears to be extended to commercial lenders, not female victims.

Auchmuty's assumes that any wrongdoer will be male and the victim female. In the CA during Barclays Bank Plc v. Rivett it was stressed that UI may indeed apply to both men and women. “There was nothing to prevent a husband raising the defence of undue influence, as a husband could be subject to the same fear of opposing a spouse's wishes as a wife”. However, currently the evidence does signal that such bad behaviour, by both men and institutions, is a widespread scenario in mortgage disputes. Auchmuty argues that “Morally reprehensible behaviour by men is so common as to seem normal and acceptable and, therefore, unworthy of comment”, being why little fuss is made in such cases and why the Courts are concerned to protect the bank and not the women.

In a numerous reported cases, the Court accepted that the principal debtor's UI had occurred and their attention then turned to whether it affected the transaction with the lender. As stated above, the CA in Etridge held that lenders would not be fixed with constructive notice of UI if they had received confirmation from a solicitor that the surety had been advised of the transaction being entering into. In light of this, Auchmuty suggests the banks are left better protected than the women who are in-fact victims of the undue influence in the first instance.

In Barclays Bank Plc v. Caplan the bank arranged for the wife's “independent legal advice”. This was given by the solicitor who also acted for her husband and his company. As such, it was held whether the solicitor's advice to her was competent or independent was an “irrelevant” consideration as she “would have entered into the charge... whatever [the solicitor] had said... because she believed in her husband's ability to make a success of the new business”. Consequently, the wife was precluded from suing the solicitor for negligence, being her last chance of compensation. Neither the bank nor the solicitor would be held liable for the advice, which was or was not given, because she would have disregarded it in-light of her husbands influence either way.

There are numerous examples of UI cases where many types of fraudulent behavior have been conducted by the principal debtors in order to finalize the transactions. However, both lenders and lawyers have also come under a great deal criticism for their behavior in relation to female clients. In Barclays Bank v. O'Brien [1994] a “side-letter” advising the wife to seek independent legal advice was folded back leaving only the visible page on which to sign, additionally, no effort was made to explain the effect of the charge or ensure that she had read or even understood the contract. In O'brien, Lord Browne-Wilkinson stated that lenders should be forced to give suitable advice to women sureties and confirm they understand the gravity of the transaction during a separate appointment. In spite of this, such has not been implemented with banks instead following the current “Banking Code of Banking Practice”, requiring the surety to obtain “independent legal advice”. However even this has been reported to be ignored. In Barclays Bank v. Khaira the bank employee failed to obtain Mrs Khaira's signature to the loan or witness it. Despite such unprofessional conduct, even in-light of his misrepresentation, the husband's testimony was preferred to that of the wife. Arguably, this may pertain to be evidence of equity's unequal treatment of the sexes.

Auchmuty also complains that commercial lenders have been known to use over-complicated, needlessly technical and even incorrect forms during transactions. In Etridge Lord Hobhouse criticised the prevalence of forms “favourable to the bank and excessively onerous to the surety”. However, such a criticism has not prevented the Courts from finding in favour of the banks. In Dunbar Bank Plc v. Nadeem [1998] the bank incorrectly used an “all-moneys form” instead of a limited one. Nonetheless the defendant lost her case as the bank claimed it in no way intended to enforce the all-moneys clause, hence the transaction was not to her manifest disadvantage. Arguably the author Chandler makes a good point on this case; that it is the potential liability under the all-moneys clause that should matter, as it could technically be enforced.

The HOL decision in Etridge may be considered a reprimand to commercial lenders and legal advisers. However from a feminist point of view, arguably despite this recognition of institutional shortcomings, the lenders' power has not been particularly truncated and evidently the assumption that the family home must be available as security for business loans still pertains to exist. Reportedly much academic debate of the 1990s responded to the debates over O'Brien with regards the place of equity in the commercial law field. However in light of the post Etridge case law, it may be argued that equity's place in this area is in protection of commercial lenders against women seeking to have mortgages set aside, rather than the opposite.

The Etridge guidelines may be considered to say little about the acts of UI themselves or their perpetrators. Feminist authors have contrasted this unsatisfactorily with O'Brien, which Auchmuty suggests is “radical” in that it recognises that such questions of fairness ultimately hinge on gender relationships.

While the inclusion of homosexual couples within the O'Brien guidelines offers, in Auchmuty's opinion minimal protection for such groups. Under Etridge lenders will only be put on inquiry if they are aware of the relationship between the principal debtor and the surety. As such groups are reportedly reluctant to “come out” to strangers, potentially lenders may protest at a lack of notice. To counter this, one might argue any such loan application form should be amended to take this into account by requiring confirmation of sexual preference.

Another such problem highlighted by Auchmunty comes from the effect of the judgment in Alliance & Leicester Plc v. Slayford. This permits that mortgagees who are denied possession orders shall be able to sue the principal debtor in personam to render him bankrupt. Unless the family home is rendered exempt from any sale of assets for the benefit of creditors, women sureties will still lose their homes despite these rights.

One might argue that the cost of confirming, or otherwise, a woman's interests during a separate individual interview may appear to be a fair consideration for an irreproachable transaction. However, similar suggestions have been rejected by the lenders. Even under the Etridge protocol, as discussed, the banks are not expected to carry out such face to face meetings. Debatably, such an attitude may imply the Court's support for Government policy and a belief in the machinery of Capitalism.

In light of the banks interests' nearly always coming first, Auchmuty believes there is evidently no balancing of interests. She believes that “Capitalism itself reproduces patriarchy, if only because women's access to the benefits of capitalism is often through their association with men”. Clearly it is unfair to attempt to balance these two unequal sets of interests; the banks are wealthy and powerful institutions with ready access to sound legal advice in the event of default, whereas the women are generally minnows without any such resources. “What the judges are really balancing is their camaraderie with the financiers and the degree of judicial interference they can get away with”.

Confusingly, the law may be said to maintain inequalities while professing to maintain equality in that it separates the idea of (equal) people from the (unequal) property they own. Upon being party to a mortgage agreement, women are treated like rational economic men which may, on occasion, be somewhat distanced from the truth. As evidenced by case law, a woman may consent to a second mortgage simply because she trusts her husband's judgment, she may not understand what she is doing, and she wishes to restrain him from harassing her. In light of this, a woman's decision cannot always be considered self-interested and/or an independent choice. As Fehlberg states “judges oversimplify to a large degree the emotional and economic reasons why women provide security”. The requirement of “manifest disadvantage” has often been applied by judges whom fuse together the interests of both the husband and wife. However, putting the family home at risk may in itself be a manifest disadvantage to the woman over and above any potential gain to the husband.

Equity's view of equality flows from the fact that to treat women any differently or preferentially would be, as Graham Battersby states; “unacceptably patronizing and wholly inconsistent with modern notions of the status of women”. Should the protocol of Etridge be followed adequately, one may argue it should offer adequate protection for any surety. Arguments stating women are incapable, even after receiving independent legal advice, of taking a binding decision are highly doubtable. While it is plausible that women in these situations are indeed subject to domestic and social pressures that might cloud their judgment, so are many other people who agree to other forms of contracts, yet men are not generally rescued should they agree to extortionate loan agreements due to business pressures, domestic difficulties or simply because of a failure to read the terms. So in light of equality, why should the Courts rescue women who co-sign mortgages in similar situations.

Unquestionably, the economy requires strong legal certainties for commercial parties to successfully operate. Should the law not be laid down in such a fashion, commercial lenders would stop lending to individuals for fear of losing their security. The byproduct of which, as we are currently feeling due to the present lending crisis, would be an inescapable slow down of the economy. Throughout her argument, Auchmuty depicts the commercial lenders as bad guys who have failed to protect “helpless” women; however it is surely for the good of society that they exist to lend money while keeping the English economy buoyant.

To conclude, it is evident that Auchmuty does base her argument on case law and the reality of the situations which “some” women may face. Part of her argument is also supported by a comparative study of other common law jurisdictions in which legislation prevents the sale of the family home for the benefit of creditors. However other parts of her argument are perhaps prejudicial and tainted. One might note her lack of economic analysis as palpable, thus letting down some of the other observant criticisms she does make. Auchmuty states that lobbying, education policies and the reassignment of gender roles will create legal reform in the area, yet no policies are mentioned to remedy the imbalance she claims. As discussed above, commercial law requires a black and white system which allows commercial lenders the maximum amount of certainty in their financial dealings, obviously the introduction of grey areas would make it difficult for them to plan financially. The Etridge protocol, criticised by Auchmuty, has subsequently been said to be sufficient to assist offset the possibility of people being lured into mortgaging their share of a property.

Today it is 2008, we are now in the 21st century, archaic notions that women are inferior to men in both terms of society and financial effects have long since passed. Since 1994, one third of all primary home buyers in the US market have been women with a similar figure predicted here. If women are capable of understanding the consequences of having a first legal charge, then why not a second?

As such and in light of the sizeable silhouette cast by equality, arguably there are no valid arguments to declare women should be treated preferentially. The English legal system must provide rigid law. To not do so would result in financial uncertainty to the detriment of society as a whole, which in turn would result in the grave failure of the English economy, causing unprecedented chaos in Courts across the breadth of the English legal system.