KAY ALISON DAVIES v NORWICH UNION LIFE INSURANCE SOCIETY (1998)

CA (Evans LJ, Morritt LJ, Chadwick LJ) 4/11/98

GUARANTEE AND INDEMNITY - REAL PROPERTY - BUILDING SOCIETIES

UNDERWRITING MEMBER OF LLOYD'S : LIABILITIES SECURED BY GUARANTEE : SECURITY FOR GUARANTEE PROVIDED BY LEGAL CHARGE ON MATRIMONIAL HOME : WIFE AGREEING TO CHARGE : CHANGE OF GUARANTORS : SECURITY FOR LEGAL CHARGE RAISED WITHOUT WIFE'S KNOWLEDGE : UNDUE INFLUENCE : MANIFEST DISADVANTAGE : CONSTRUCTIVE NOTICE

The plaintiff was induced, by her husband through undue influence, to agree to the defendant having a legal charge over the matrimonial home. The defendant, having failed to enquire whether she had been properly advised, was not entitled to enforce the charge against her.

Defendant's appeal from the order of Sir John Knox made on 31 January 1997 whereby firstly it was declared that the charge executed by the plaintiff in favour of the defendant and dated 21 December 1989 was not enforceable against: (a) the plaintiff's beneficial interest in land known as Tucker's Farmhouse, Gatcombe, Newport, Isle of Wight (Title No.1W 7139) and (b) the plaintiff's interest in the proceeds of sale of that land; and secondly it was ordered, inter alia, that the defendant pay to the plaintiff £112,415.22 together with interest in the sum of £27,423.15. Mr Davies, the plaintiff's husband, was an underwriting member at Lloyd's. Until December 1989 he had supported his membership by means of a guarantee from Manufacturers Hanover Trust Co ('MHT'). Security for that guarantee was provided by a form of charge over the matrimonial home which he owned jointly with the plaintiff. The guarantee by MHT was initially in the sum of £125,000, but on 1 January 1989, the guarantee was increased, with the plaintiff's consent, to £150,000. Since the MHT scheme carried an annual fee, Mr Davies decided to enter into a new agreement with the defendant. In his application, Mr Davies specified the amount of the guarantee he required as £150,000. However, at some point before completion Mr Davies asked to increase the new guarantee to £225,000. Mr Davies' solicitor, Mr Hibberd, was instructed to report on title and to act in procuring the execution of the charge. On 24 January 1993, the plaintiff petitioned for divorce and a decree nisi was made on 26 April 1993. By a letter dated 21 October 1993, the defendant was informed that the plaintiff and her husband proposed to sell the property. On 9 December the plaintiff's solicitors acting for her in the divorce proceedings, wrote to the defendant stating that in their opinion the defendant's charge and guarantee were ineffective against the plaintiff by reason of undue influence in accordance with the principles of Barclays Bank v O'Brien (1994) 1 AC 180. They further stated that a favourable price had been offered and asked the defendant to consent to a sale on the basis that the net proceeds would be paid into a joint account in the names of Mr and Mrs Davies' solicitors. The defendant's response was that it was not willing to consent to a sale unless either: (i) another property was offered as alternative security, or (ii) the defendant was released from its liabilities to Lloyd's. On 16 December 1993, the defendant confirmed that it would not agree to the release of its charge except on one or other of those terms and concluded that it was unable to assess the validity of the plaintiff's claim since no evidence had been submitted in support. By a letter dated 17 December 1993, the plaintiff's solicitors wrote to the defendant stating that the plaintiff had no alternative but to agree to the sale taking place on the defendant's terms. The property was sold in January 1994 and of the net proceeds of the sale, £45,298 was paid to the defendant which represented the figure already paid by it to Lloyd's plus interest and £180,043 was paid to Lloyd's to procure the cancellation of the defendant's guarantee. The residue sum of £32,725 was then paid to the plaintiff and her former husband. On 24 August 1994, the plaintiff issued a writ claiming a declaration that the defendant's charge was not enforceable against her beneficial interest in the property and an order requiring the defendant to repay the sum of £112,414. On 31 January 1997, the trial judge held in favour of the plaintiff on the following grounds: (a) the increase in the sum guaranteed by the defendant over that guaranteed by MHT was a manifest disadvantage sufficient to render the defendant's charge voidable for undue influence; (b) the defendant had failed to take sufficient steps to avoid constructive notice of the plaintiff's equity; (c) the defendant failed to inform Mr Hibberd of the proposed increase in the amount to be guaranteed and failed to ensure that Mr Hibberd was acting for the plaintiff; (d) the plaintiff's claim to restitution succeeded because the case was indistinguishable from Fraser v Pendlebury (1862) 31 LFCP 1. The defendant appealed. The issues raised were: (i) whether the plaintiff was induced by undue influence by her husband to enter into the NU charge; (ii) if she was so induced, whether the defendant's charge was enforceable by the defendant as against the plaintiff or did the defendant have constructive notice that her signature was procured by undue influence; and (iii) if the defendant's charge was not binding on her, whether the plaintiff was entitled to recover half the net proceeds of sale from the defendant.

HELD: (1) The judge was entitled to hold that the increase in the sum guaranteed by the defendant over that guaranteed by MHT was a manifest disadvantage. Since the property had been valued at £300,000 the increase of the charge would mean that the plaintiff's interest was at risk, as the value of the defendant's charge represented 75 per cent of the value of the property. Therefore, instead of the liability falling on Mr Davies' beneficial interest alone it would also cut into the plaintiff's who was at risk of losing £75,000. Whether or not as a matter of law the defendant was entitled to raise the sum guaranteed without the plaintiff's consent, on the facts of the case that was not the position under the MHT charge. When they had raised the charge to £150,000, although not obliged to, they sought the plaintiff's consent. It followed that the plaintiff had succeeded in showing that the transaction with the defendant was to her manifest disadvantage (see National Westminster Bank v Morgan (1985) AC 686). Moreover, this was a transaction which was of great benefit to Mr Davies and it was clear that the plaintiff reposed trust and confidence in her husband and had signed the documents without knowledge of the increase and its likely effect upon her interest in the property. The signing of the charge papers by the plaintiff could only be explained on the basis that undue influence had been exercised in order to procure her signature. (2) Following the O'Brien case (supra), a creditor should be put on enquiry when a wife stands surety for a loan. The judge observed the general test as being whether the defendant had taken reasonable steps to find out if the plaintiff's agreement had been properly obtained. Since the date of judgment the CA had re-examined the question of constructive notice in Royal Bank of Scotland v Etridge (1998) TLR 17/8/98. It was clear that where a wife dealt with a bank through solicitors, the bank was entitled to assume that the solicitors had advised their client properly. However, where the wife was not acting through solicitors, it would be sufficient if the bank urged her to obtain legal advice. In the instant case, the plaintiff had not acted through her solicitor and the defendant had not urged her to seek legal advice. Accordingly, in answer to the question whether the defendant took reasonable steps to find out if she had taken legal advice, the answer in the court's opinion was no. Moreover, on the facts the defendant took no steps at all. Therefore, the judge was right to decide the second issue in the plaintiff's favour. (3) The court felt that the defendant's refusal to accept the plaintiff's proposal that the proceeds of sale of the property should be held in an account pending the outcome of her claim was high handed and irrational. Furthermore, the defendant's assertion that they could not assess the validity of the plaintiff's claim was unfounded. It was apparent in the letter of 9 December that the issue of undue influence was being raised and the defendant's could have gone to their records to make any necessary enquiries that might establish that her claim was well founded. Accordingly, the plaintiff was entitled to recover half the net proceeds of sale from the defendant.

Appeal dismissed.

Michael Briggs QC and Gilead Cooper instructed by Norwich Union Group Legal Department (Norwich) for the defendant. Jonathan Gaunt QC and Nicholas O'Brien instructed by Robinson Jarvis & Rolf (Isle of Wight) for the plaintiff.

LTL 4/11/98 EXTEMPORE (Unreported elsewhere)

Judgment Official

Document No. AC9500069