The Gazette 1994

GAZETTE

JUNE 1994

H u s b a n d s a n d W i v e s - U n d u e

I n f l u e n c e i n B a n k i n g L a w

by Christopher Doyle BL*

The Nature of Undue Influence

Undue influence occurs where one

person (the wrongdoer) without the

use of coercion succeeds through a

dominating influence in persuading

another person to enter a transaction.

The victim is entitled to have the

transaction set aside as against the

wrongdoer and as against a third party

who had notice of the undue influence.

Undue influence is a form of fraud:

where it is proved, the victim need

now show loss, since a wrongdoer is

never entitled to profit by his wrong.

Undue influence may be actual or

presumed. Where actual undue

influence is alleged, the person

claiming it must prove it. In the case

of presumed undue influence, the

burden shifts to the alleged wrongdoer

to prove that no such influence was

exercised. The presumption will be

raised where a confidential

relationship exists between the parties.

There are certain categories of

relationship - for example, solicitor

and client - where the presumption

arises as a matter of law. Banker and

customer is not such a relationship;

neither, strictly speaking, is husband

and wife, although the position here is

rather confused.

Undue Influence in Banking Law

Claims of undue influence were

infrequent in banking actions until

about 1970. Since the 1970s, the law

has developed with extraordinary

speed in the UK. Certain judges

attempted to replace the doctrine of

undue influence with one of

"inequality of bargaining power". Had

the attempt succeeded, the

consequences for banks might have

been severe. In

National Westminster

Bank v Morgan

', however, the House

of Lords rejected the new doctrine. It

also seemed to suggest that undue

influence will not usually arise in

what it called a "normal banking

transaction".

Christopher

Doyle

As between banker and account

holder, the

Morgan

decision no doubt

made life a little easier for banks.

However, claims of undue influence

frequently arise over secondary

obligations entered into by the wife of

a customer.

Morgan

did not check the

flow of claims by wives who claimed

to have entered such transactions

through the undue influence of the

bank or of their husbands.

The question which has caused the

most trouble is whether the bank

should be penalised when the undue

influence is that of the husband.

Numerous decisions by the Court of

Appeal failed to settle the matter.

Finally, in

Barclays Bank v O'Brien

the House of Lords stated that the

bank will normally be prevented from

recovering against the wife only

where it has notice of the husband's

wrongdoing. At the same time, in

CIBC Mortgages v Pitt

the House

doubted its previous suggestion in

Morgan

that undue influence is

unlikely to arise in normal banking

transactions.

Irish law develops more slowly than

English. In theory this should give the

Irish Courts time to analyse and

criticise English decisions. All too

often, however, Irish courts merely

copy English law. Where the English

decisions conflict (as those of the

Court of Appeal before

O'Brien

did) it

is all too likely that the Irish courts, in

copying them, will also conflict. The

first two decisions on this point.

Bank

of Ireland

Smyth

and

Bank of Nova

Scotia v HogatY

show markedly

different approaches. In the first

Geoghegan J imposed a heavy burden

on a bank which seeks to escape being

tainted with an husband's undue

influence. In the latter, Keane J stated

that undue influence does not usually

arise in normal banking transactions.

Both decisions have been appealed to

the Supreme Court.

Undue Influence by the Bank

There is no presumption that a bank

unduly influences a customer or a

surety: a wife who claims that the

bank exerted such influence must

prove her case. Claims that the bank

itself unduly influenced the wife are

relatively uncommon; more often a

wife claims that her husband was

acting as the bank's agent. In

National

Westminster Bank v Morgan

the wife

did allege that it was her bank

manager who influenced her to create

a charge over the family home. The

claim failed. There was nothing in the

relationship between Mrs Morgan and

her bank manager to raise the

presumption that he was likely to

unduly influence her and she had

failed to show on the evidence that

any such influence had been

exercised. Nor did the House feel that

in what it termed a "normal banking

transaction" there was any duty on the

bank to recommend that the wife take

independent legal advice. Further it

suggested that even if the bank had

exercised undue influence and if it

should have recommended legal

advice, the transaction would not be

set aside unless the wife showed that

it was to her "manifest disadvantage".

CIBC Mortgages v Pitt

this last

suggestion was disapproved; it was