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Published: Fri, 02 Feb 2018
Compare and contrast the English approach
The frequent case scenario as regards bank lending transactions involves three parties; the creditor which is the lending institution, the debtor and the third person who is acting as the guarantor of the debtor. The typical scenario just described in broad terms should not give rise to any confusions or misunderstandings. However, the picture changes if we add certain important details. The third party which signs the guarantee might be the debtor’s wife, or child or parent or anyone who is in direct or indirect relationship with him and who is subject to his instructions and wishes; the surety might either realizes that or might be described as a willing person who is ready to ‘sacrifice’ only property in order to provide financial help to the debtor’s business. The profile of the person that I have just described attracts special protection from English law because of its vulnerability.
The second part of the scenario comes in when the debtor fails to pay his installments. The bank seeks to enforce the charge but the third party usually claims as a defence, undue influence or a misrepresented situation by the debtor. If this argument succeeds, then the bank is left with nothing at all. In practice, in situations where the charge is on the matrimonial home, the husband will certainly confirm that he unduly influenced the wife. Who would want to loose his home anyway?
The essay is going to deal with the position of English law as regards the protection it affords to vulnerable sureties and attempt to provide a critical analysis of it through the plethora of cases which have reached the courts. The second part is going to examine how these situations are faced under Scottish law. The comparison and contradiction of the two is challenging since the two jurisdictions are only a borderline away but still have different legal systems which allow them to take different decisions. However, the same financial institutions which have branches in both jurisdictions ‘push’ towards the adoption of a universal route. The third part is going to be a clear comparison of the two systems on certain points which derive from the previous two. The essay is going to conclude with a general observation of the policy adopted.
The suretyship transaction, a term which is used in England, is really ‘delicate’. The polycontextual function  of suretyship requires for a balancing intervening power. On the one hand is the overprotection of the surety which is most likely to lead either for the lenders not to accept the suretyship or to increase the interest rate in order to mirror the risk taken. On the other hand, by not protecting the surety, family law, property law, consumer law will enter the field striking to find a way to offer a shield. The issue however is not the measures which they have been taken in order to protect the surety/cautioner. The vital question is who should she be protected from? The creditor or the influencer? Moreover, who is really protected in each jurisdiction?
THE ENGLISH APPROACH
Who is the vulnerable surety and policy reasons for protection.
As it derives from case law  the courts are not willing to protect someone from his own actions, if ‘he is capable of managing his own affairs’  . However, the case of the vulnerable surety can find shelter in the equitable doctrine of undue influence or misrepresentation or any other vitiating factor. There is no single description of the type of relationship;
“…trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other. None of these descriptions is perfect. None is all embracing. Each has its proper place.” 
Lord Nicholls recognized the special protection by stating that:
“the law has adopted a sternly protective attitude towards certain types of relationship in which one party acquires undue influence over another who is vulnerable and dependent and, moreover, substantial gifts by the influenced are not to be expected.” 
This special category was analysed in the case of Barclay’s Bank v O’Brien  by the Court of Appeal. Scott L.J. (as he then was) spent considerable space in examining the case law on the issue and reached finally the view that wives should be afforded special protection in equity. Yerkey v Jones  , the Australian authority on the issue established that wives need for special protection which let the lender helpless in trying to enforce the charge. Accordingly, a woman who stands surety for her husband without understanding the effect of the guarantee has a right to set it aside against the creditor. Scott L.J. provided that the reason for such protection is traced in the fact that there are women which still entrust the family financial affairs blindly to their husbands and they do not have the economic independence and knowledge to come across with the results of such transaction. Even though, this could be characterized as anachronistic and maybe discriminatory against the women, it is in fact true. In the 1990s, the position was of course much different than Scott L.J. described, nevertheless he was trying to provide fend for those cases which could arise with the similar facts. This special category does not only include the wives-sureties but also, based on the earlier case of Avon Finance Co Ltd v Bridger  , the Court extended the principle to a case of parents giving security to their child. After Avon, the subsequent cases followed the totally opposite line and declined to recognize the special category of vulnerable sureties  .
The special equity theory was later rejected in the same case in the House of Lords  by Lord Browne Wilkinson. He explained that the position was clarified in the 19th century in the case of Bank f Montreal v Stuart  where it was established that the husband and wife relationship did not raise any presumption of undue influence. Moreover, he supported the view that equality of sexes leaves no space for this type of protection as well as the need for a balancing action as regards the matrimonial house. The sympathy for the poor woman against the rich and powerful bank is easier to be gained by the Court and the banks may, for this reason, in the future regard the matrimonial house as unacceptable charge. The idea to have either as statute law or case law the principle not to render the matrimonial home as security was rejected since this would not be beneficial for either of parties. For him, the key was in the right application of the doctrine of notice which ‘lies in the heart of equity’  , in combination with the doctrine of undue influence.
The ‘invalidity tendency’ , as Dixon L.J.  described the attitude of the Court towards married women, comes in to play not from the very beginning but instead when the wife is trying to prove undue influence under Class 2B. Undue influence by the husband is easier to be established than by others according to Lord Browne Wilkinson, since the wife will not want to place their relationship into a vulnerable position; she chooses for herself to take that position. This attitude is not limited only towards the legal wives; cohabiters, homosexual and heterosexual are also included.
Finally, the rejection of the special category and the adoption of a more broad approach as regards the partners – including both legal spouses and cohabiters- can find support from a sociological prospective. Why should the wife be presumed to be vulnerable? As Stephen M. Cretney states “the effect of the Court of Appeal’s decision will be to give unnecessary and unwarranted protection to married women such as Mrs. O’Brien”  who was not in a vulnerable position.
What should the surety prove?
Although there is a plethora of caselaw on the issue, I am going to consider and follow the reasoning adopted in the leading case of Barclay’s Bank v O’Brien. The case did not succeed on the grounds of undue influence but instead the wife achieved to establish misrepresentation. Lord Browne – Wilkinson tried to enlighten the principles governed the specific area. He firstly adopted the position established in Bank of Credit and Commerce SA v Aboody  . The case developed the traditional classification of undue influence. Following the reasoning the doctrine is divided into two classes. In Class 1 the claimant has to prove that the wrongdoer exercised undue influence on him which resulted in taking part into the transaction. The second class is the most problematic one. It is divided in two sub-categories; Class 2(A) includes types of relationships which raise the presumption that undue influence has been exercised. Such relationships are the doctor-patient, solicitor-client and parent –child. Class 2(B), on the other hand, includes those situations where the party places trust and confidence to the other party, even though the type of relationship cannot be given expressly. Once either of these is proved the burden shifts to the influencer to prove that he was not committed a wrongdoing.
The Court however, went further and adopted the problematic manifest disadvantage concept. According to Lord Browne- Wilkinson it should be satisfied that the transaction was to the manifest disadvantage of the wife. The classic case scenario of the wife undertaking a financial obligation and receiving nothing as consideration is definitely into her manifest disadvantage. Its role is of ‘dual significance’  according to Stuart-Smith L.J. He considered that manifest disadvantage helps firstly the claimant to establish his case against the wrongdoer in cases of presumed undue influence and secondly it is material in a three party relationship – bank, husband, wife- in order to notify the third party of the ‘terms’ of the relationship.
Lord Nicholls  had analysed the issue by considering the two different types of relationship; bipartite and tripartite. Where there is a bipartite relationship the manifest disadvantage is quit straightforward to be established. It is obvious whether or not the party has been put in detrimental situation. However, in a tripartite relationship manifest disadvantage does not offer much flexibility or clarification in this complex area. In a husband and wife relationship the disadvantage cannot be easily obvious. The wife by signing the charge and setting her matrimonial home as a guarantee, is definitely and apparently in a disadvantageous position. Nevertheless, the desperate wife can also be in some way a winner since it is for her indirect advantage her husband to be provided an overdraft for his business’ loan which could only be achieved if she follows her husband’s instructions. This means that the husband will continue working and gain the family wage. Also, the same point was made by Lord Nicholls in the case of Royal Bank of Scotland v Etridge No.2  ; the fortunes of the spouses are inevitably connected. He concluded by adopting the position made in Allcard v Skinner  and by Lord Scarman in National Westminster Bank v Morgan  that “a wife standing surety of her husband debts must not be a transaction which failing to prove the contrary is only explicable on the grounds of undue influence”  . He chose not to adopt the label of manifest disadvantage but instead to establish a new one. The surety has to prove that there is a relationship of trust and confidence in the other party and the existence of a transaction which ‘calls for explanation’  .
Where does this leave the wives? As Georgina Andrews says the position of the wives is ‘catastrophic’  . Etridge restricts considerably the approach taken in O’ Brien. A vulnerable wife and generally a vulnerable surety which has the profile described at the very beginning is definitely on these grounds not able to prove that she has suffered a disadvantage; in the contrary, the transaction can only be in her advantage since this was the only way that she was able to have food on the table.
The bank – Did the bells ring?
The position of the bank is the one which have changed remarkably the last years. Although the traditional position was that the bank does not owe any fiduciary duties to its customers, this has changed. The invasion of Lloyd’s Bank v Bundy  clarifies that the bank shall not cross the golden line. In addition, in the tripartite relationships the question is not whether the transaction is voidable against the debtor but instead in banking law the issue is whether it is voidable against the bank. As Lord Browne Wilkinson explained in O Brien one way to achieve this, is the agency route; whether the debtor is acting as the agent of the bank. If this is what happened the bank will be fixed with notice for its agent’s wrongdoing. However, this case scenario is very rare. The bank cannot, nevertheless, escape so easy since the second route is whether the bank has actual or constructive notice of the debtor’s wrongdoing even though the latter is not acting as its agent. He moved on to find that the bank would be bound if “(a) the transaction is not on its face to the financial advantage of the wife and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.”  In order for the bank not be fixed with notice, Lord Browne – Wilkinson suggested that the bank should ensure that the wife without her husband, attend a private meeting with a representative of the bank in order to explain to her the risks and liabilities of the transaction and urge her to take independent legal advice.
Etridge  took Lord Browne- Wilkinson’s opinion a step further, or maybe steps further. Lord Nicholls had chosen to set a low threshold as regards the bank to be put on inquiry whenever the relationship is a non-commercial one, underlining that companies could take care of their own financial activities. A non-commercial relationship will include the spouses, homosexual, heterosexual relationships as well as the relationship of employer and employee  .
The noticeable in the case is that the House of Lords have chosen to provide a clear guidance regarding the steps that a creditor should take in order not to find itself trapped in the surety’s claim for undue influence. Accordingly, the core minimum steps include not only to urge the wife to seek for independent advice but instead it should satisfy itself that the wife has taken independent advice  and consequently is entering the transaction freed from any kind of vitiating factors. The bank must provide to the wife’s solicitor all the material information about the husband’s indebtedness, the amount of his current overdraft facility and any other relevant data. However, at this stage the bank should obtain the consent of its client in order not to breach the confidentiality duty it owes to him. From this moment on, the process of the transaction is in the hands of the solicitor. The bank is allowed to rely on the confirmation letter given by the solicitor, unless it has reasonable grounds to believe that he did not do the required job.
The solicitor – The changing role
The only relationship between a solicitor and the specific transaction was that the bank could urge the wife to obtain independent legal advice. This was the valid position before the case of Etridge which appears to split the duty owed to the surety between the bank and the solicitor. Following Lord Nicholls reasoning, the solicitor is going to inform the wife of any risks and liabilities she is likely to be exposed by signing the charge. The solicitor is to advice according to the documents he has in front of him which concerns among others the indebtedness of the husband. He is not to take the decision for the wife but merely to enforce her decision. He rejected the earlier view taken by the Court of Appeal in the same case which imposes a really heavy burden on the solicitor to satisfy himself that the surety is entering the transaction acting independently and invades to the couple’s personal life whenever his professional judgement suggests doing. He limited this into exceptional cases. If the role of solicitor as described in the Court of Appeal was affirmed, then this would have imposed to the solicitor the ‘additional roles of counselor, financial adviser and general confidante’  .Wong justifies the Court of Appeal’s approach, it tried ‘to ensure that the legal advice given will counteract earlier criticisms about its perfunctory nature’  .
KEY CONCLUDING POINTS
The House of Lords’ decision in Etridge is a welcome development of the O’ Brien principle. Are the guidelines offered sufficient to protect the wife? Who are they really protecting? Simone Wong characterizes the decision as ‘a pragmatic solution’  . It removes the uncertainty created by the classification by adopting the non-commercial relationship. This low threshold is, as she continues, a more surety-sympathetic approach in contrast with the post- O Brien cases. However, this is the only part which seems to help the surety. The burden moves from the bank to the solicitor. The qualitative element of the advice is not being considered in any of the steps provided by Lord Nicholls. The bank can now be freed from notice as easy as it is put on inquiry.
THE SCOTTISH APPROACH
Scotland is a mixed legal system and this allows it to choose which route to follow. In this particular area, Scotland had the chance to choose between the common law doctrine of constructive notice and the civil law route of good faith. The position before the landamark case of Smith v Bank of Scotland  can be found in Royal Bank of Scotland v Greenshields  ; it was merely for the creditor to correct misapprehensions and not to mislead by omission. The duty of good faith is not extended in contract law but after Smith this is overturned as regards cautionary obligations. The Scottish Court apparently influenced by the neighborhood jurisdiction agreed to the policy reasons for protection underlined in O’Brien decided to do an impressive innovative move towards the protection adopted.
In 1995 the Court rejected the O’ Brien principle as having no place in Scots law in the case of Mumford v The Governor and Company of the Bank of Scotland  . Two years later, the House of Lords reversed this decision, establishing a new general principle in the case of Smith v Bank of Scotland  . The case established the obligation of the creditor to act in good faith in the cases of cautioner transaction.
Scott F. Dickson  recognizes the importance of Smith for three main reasons. Firstly, it imposes a new duty; the creditor should advise the cautioner for the risks taken. Secondly, this new duty was based on the general principle of good faith which played after the decision an important role in contract law. Lastly, the House of Lords’ activism achieved to develop a rule which reflect the trend in the other side. The latter, was subject to criticisms since as Dickson underlines it was an ‘unprincipled’ rule which should had not been adopted in the Scottish law. Also, even it can be seen as a good development, it had certainly not taken the correct route. This was also observed by Gretton who saw that:
“It is a truism of legal philosophy that there is no razor sharp distinction between judicial interpretation and application of the law, on the one hand, and judicial legislation on the other. To interpret is to legislate. But the fact that there is no sharp distinction does not mean that there is no distinction.” 
What should the surety prove?
In the cases of undue influence Scottish law made it clear that the husband and wife relationship was never belong to the category of presumed influence. This was underlined by Lord Jauncey in Smith v Bank of Scotland  as the similar point between the two jurisdictions. The intervention of the Court is allowed where “a gift has been acquired by abuse of a position of trust and which at least cry out for an explanation even though the precise mode of abuse is not known and might indeed be too subtle to be readily capable of precise explanation.” 
The decision in Braithwaite v Bank of Scotland  dared to challenge an important issue. One of the principal questions to be answered by the Court was whether it was a prerequisite for the cautioner to establish that she had in fact acted under the debtor’s misrepresentation or undue influence. The latter was answered in the affirmative by Lord Hamilton who emphasized that:
“The concept of good faith is used in the sense that a party may not be entitled to enforce his apparent rights because he is aware of or is put on inquiry to discover some prior vitiating factor. The existence in fact of such a factor is a prerequisite to the applicability of that concept.” 
As a result the case interpreted narrowly the principle of Smith. However, this aspect of the reasoning was subject to criticisms. Scott F. Dickson  points out ‘that no actual misrepresentation or undue influence requires to be proved is clear from the formulation of the rule by Lord Clyde’. Proof of the wrongdoing, as he continues, is not consistent with the reasonable suspicion of Lord Clyde. Lord Clyde has stated that “the vitiating factor is not a matter to be considered by the creditor; what he should do is to ensure that he acts in good faith throughout the transaction.” 
The bank – Did the bells ring?
The starting point is found in the judgment of Lord Clyde in Smith. According to the principle where there are circumstances which would lead a reasonable man to believe that there is a possibility that the cautioner’s consent is not given freely or that the cautioner is not fully informed, owing to the closed nature of the debtor-cautioner relationship, then the creditor in order to remain in good faith has the duty to take reasonable steps to inform the cautioner about the consequences of the transaction or urge (s)he to undertake independent advice  . Apparently, the doctrine of good faith was extended in cases of mere suspicion and not only where the misapprehensions were actually known to the creditor. 
He continues by suggesting that the bank should explain to the cautioner the potential liabilities and risks taken by signing the guarantee and urge her to obtain independent legal advice in order to act in good faith. Gretton sees “the rule as being one for determining in what cases a vitiating factor in the cautioner’s consent may be pleadable against the creditor”  .
Moreover, the creditor is still acting in good faith where the cautioner obtains a legal advice unknown to the bank. A decade ago the case of Forsyth v Royal Bank of Scotland plc  offered this slightly new scenario to be considered. Accordingly, what if the creditor fails to provide guidance as regards the implications of the transaction to cautioner and unknown to the creditor the cautioner obtains independent legal advice which in turn fails to point out the risks of the transaction. Even if the creditor is apparently in breach of the duty to act in good faith, does the fact that there is an advice obtained by a third party cover the creditor’s breach? According to the words of Lord Macfadyen what matters is what the creditor knew or had reasonable grounds to believe as regards the cautioner’s action. The fact that she might have a solicitor acting for her is totally irrelevant. If the bank has reasonable grounds to believe and not even actually, then this sufficient for the bank to remain in good faith. So, if the debtor merely introduces the solicitor to the banker as the family’s lawyer, this offers adequate grounds to the bank to infer that the solicitor is also acting for the wife.
The last case to be observed is the case of Clydesdale Bank v Black  . The reason of its significance is that it came after the case of Etridge and it is vital to note the approach of the Scottish Courts towards the core minimum steps established in the English authority. Lord Coulsfield found that the Scottish law on this context should remain less prescriptive than the English law and found support on Lord Clyde’s reservations on the issue in Smith. The decision of the House of Lords in Etridge where Lord Clyde took part, had nothing new to add in the decision taken in Smith  . The bank does not need to check whether or not the cautioner has received the solicitor’s advice or not. This allows the two parties’ paths – the bank and the solicitor-not to overlap.
KEY CONCLUDING POINTS
The Court has chosen not to offer much guidance on the duties of each party. Even though there is much English influence in the specific area, the Scottish position is much less descriptive to the disappointment of the creditors and the solicitors. Who is eventually protected? Although it is offering protection to the vulnerable on the one hand, one the other, it leaves many windows open for the creditor to escape. The most apparent is the Forsyth case where the creditor can easily escape by a reasonable belief. It is obvious from Clydesdale that the protection offered to the vulnerable cautioner is limited. How far does the solicitor need to go? Not far enough since he must not satisfy himself that the surety consent was truly given free. What should also be observed is that there are no obligatory steps to be followed by the lender which render the presence of a solicitor absolute.
COMPARISON AND CONTRADICTION
(1) DOCTRINE OF CONSTRUCTIVE NOTICE VS GOOD FAITH PRINCIPLE
The landmark decisions of O Brien and Smith witness the first and most important dissimilarity. The concept of constructive notice has been seen as a solution to this complex area in England. “Traditionally, the doctrine of notice is used to determine priority between successive rights over property.”  In O’Brien the doctrine was used in an innovative way, since there are no such rights; the transaction is one. How far does this simplify the rules governing the specific field? This is dou
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