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GAZETTE
JUNE 1994
O'Brien.
The Law Lords could see no
reason why a limited class of persons
in a limited class of transactions
should be given a special remedy.
Further it feared that such a rule
would reintroduce the presumption
that a husband unduly influences his
wife.
The House of Lords was satisfied that
justice only requires the bank to be
barred from recovering where it has
notice of the undue influence. The test
of notice however is stringent: it is for
the bank to take steps to ensure that
the wife acted freely. While there is
no presumption, there is often a real
possibility that the wife will succumb
to pressure. Where a wife gives
security, it is generally true:-
1) that she is acting to her own
disadvantage;
2) that there is a risk that the husband
will have put pressure on her.
Therefore in such cases the bank will
always be under a duty to satisfy itself
as to the truth.
This seems a fair and reasonable rule:
but it is not clear how far it will be
adopted in Ireland. In
Hogan,
in so far
as the matter was considered at all,
Keane J merely stated that he did not
think there was any duty on the bank
to ensure that the wife acted freely.
His reason was that the House of
Lords in
Morgan
had found that in a
normal banking transaction there is no
duty on the bank to recommend
independent legal advice. It is clear
from
Pitt
and
O 'Brien
however that
this is no longer the law in the UK:
the fact the wife stands surety for her
husband's debt must alert the bank to
the possibility of undue influence.
In
Smyth
the issue was whether the
wife's consent to the mortgage of her
family home was invalid on the
ground that she had not been advised
to obtain independent legal advice.
Geoghegan J found that her consent
was invalid, simply because she had
not been so advised. He agreed with
the Court of Appeal in
O'Brien
that
wives are a specially protected class:
therefore, whenever a bank is aware
that a wife is standing surety for her
husband's debt, it is under a duty to
ensure that she obtains independent
legal advice and, if it does not, it will
be deemed that the wife did not act
freely.
Geoghegan J unfortunately seems to
have missed a crucial difference
between
Smyth
and
O'Brien.
The
House of Lords in
O 'Brien
emphasised that there are two parties
to any transaction, both of whom have
rights. If there is no undue influence
or misrepresentation by the husband,
the bank will not be penalised even it
failed to act prudently. If there
is
wrongdoing by the husband, the bank
will still not be denied a remedy if it
warned the wife of the risks involved
and recommended independent legal
advice.
This is the vital difference between
Smyth
and
O'Brien.
In
O'Brien
the
wife proved that her husband had
procured her agreement by
misrepresentation: the bank lost its
claim because it had notice of this. In
Smyth
however there was no evidence
of misrepresentation or undue
influence by the husband or anyone
else. The wife claimed that because
she was a person who
might
be a
victim of undue influence or
misrepresentation, the bank's failure
to recommend independent legal
advice in itself meant that she did not
give her consent freely. With respect,
this is neither Irish nor English law.
Geoghegan J said vaguely that the
principle is found in Irish cases on
voluntary deeds. But a deed will not
be set aside merely because it is
voluntary: the alleged victim must
show a recognised wrong, such as
unconscionable bargain or undue
influence. For unconscionable
bargain, it must be shown that one
party was actually vulnerable or in
need of special protection: Mrs Smyth
merely said that she was a person who
might
be vulnerable. Undue influence
must be proved or presumed: none
was proved, nor did the Judge find it
could be presumed. If Mrs. Smyth did
not succumb to pressure, how can it
be found that she did not act freely?
O 'Brien
is surely to be preferred to
Hogan
which relieves the bank of any
duty at all, or to
Smyth
which places
on the bank so heavy a duty that it
will be penalised even if the wife was
not victimised.
Nature and Extent of the Bank's
Duty
It is very difficult for an Irish bank to
know where it owes a duty to a wife
who acts as surety. Assuming that the
duty does exist, what is its nature and
extent? Here, Irish and English law
more or less agree. The bank has a
general duty to ensure that the wife
understands the nature of the
transaction and a specific duty to
recommend that she takes independent
legal advice. The nature and extent of
the duty will vary according to the
circumstances: in a case involving a
charge on the family home, it is
essential that the wife understands the
risk of losing it. In
Smyth
the Judge
evidently approved four criteria which
had been set out by counsel for Mrs.
Smyth:-
1) the wife must be told the amount
of the loan and whether the
security is to cover future
advances;
2) she must have the repayment terms
explained to her;
3) she must be recommended to take
independent legal advice;
4) the consequences of the non-
payment must be explained and in
particular that possession of the
family home may be recovered by
the bank, which may sell it.
Later Geoghegan J suggested that a
bank could
either
explain the
document itself
or
recommend
independent legal advice; but in
O'Brien
the Law Lords thought it
must do both. Further, the explanation
should be given in the absence of the
husband.
What is independent legal advice?
Here
Hogan
may cause difficulty. It
must be borne in mind that Keane J
disbelieved the wife's evidence.
Nonetheless his finding that the wife
had received independent legal advice
is a little odd, since the firm of
solicitors who advised her was also the
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