Balancing Interests in Mortgage Contracts

The decision in Royal Bank v Etridge did not go far enough to adequately address problems with the doctrine of undue influence. Discuss.

The contract of mortgage is an example of a contract which also depicts tensions between the interests of the parties to the contract, particularly in the context of mortgages on family homes. The tension is related to the interests of lender in the security of the property, and the interests of the co-mortgagors where one of the co-mortgagers can be adversely affected by the default and being vulnerable to undue influence by the co-borrower. This is most relevant to married co-borrowers as the case of Royal Bank of Scotland v Etridge also depicts.

The decision of the House of Lords in Royal Bank of Scotland v Etridge can be summarised as follows. If the transaction is not to the advantage to one of the borrowers in a contract of mortgage, then the lender is put on enquiry whereupon the lender must establish that they took reasonable steps to satisfy themselves that the borrowers was fully aware of the practical implications of the mortgage and that they relied on the solicitor’s confirmation that they advised borrowers correctly. One of the problem areas in the context of doctrine of undue influence is that it is particularly difficult to determine the quality of the relationship between the parties which can help determine abuse and undue influence; this area has not been sufficiently addressed by the decision of the court in Etridge. Another problem with the doctrine of undue influence not sufficiently addressed by the court in Etridge is that it is defendant centric, in that the emphasis of the court is on the conduct of the defendant; this is a problem because the court bases its assessment on the unconscionable behaviour of the defendant and not on the impaired consent of the plaintiff. In other words, the has shifted, due to the Etridge judgment to the wrongful exertion of pressure by the defendant. Yet another problem with the doctrine of undue influence, not adequately addressed by Etridge is that it is based on the presumption that undue influence does not take place if the weaker party in a contractual relationship has access to advice.

The doctrine of undue influence is categorised into presumed undue influence, which arises where trust and confidence is the basis for the relationship between two parties, and actual undue influence, which arises where it can be established that one party exercised undue influence to make the complaining party enter into a transaction. In order to establish undue influence, it has to be shown that the weaker party lost its independence to make decisions on whether or not to enter into the contract due to the influence of the stronger party. The first part of this essay concerns the significance of the doctrine of undue influence in the context of the protection of parties that are weaker while also balancing this protection with the protection of the principle of freedom of contract. One of the most important principles in law of contract is the one related to the freedom of parties to contract and indeed, this freedom can be said to be the foundation of law of contract. This freedom of contract can be compromised in cases where one party is unduly influenced into entering into a contract. This happens in contracts between parties that may not be equally situated in terms of their power or position or where one party is in the position to take advantage or influence the other due to some vulnerability on the part of the other.

Therefore, while contract law is based on the foundational principle of freedom of contract, the significance of protection of parties from undue influence is also related to the protection of vulnerable contracting parties from exploitation by stronger parties. Thus, the doctrine of undue influence can come into effect to protect the weaker party in case of an unusual transaction with a dominant party; in such cases, there is a presumption that the transaction was a result of undue influence if it can be seen that the weaker party was not encouraged to seek independent advice before entering into the contract. In Royal Bank of Scotland v Etridge (No 2), the court used this principle to explain that undue influence comprises “abuse of relationship of trust and confidence”, so that it became necessary to show that there is a relationship of a kind between the parties where the exercise of undue influence is possible.

As mentioned in the introductory part of this essay, one of the particularly difficult problems in doctrine of undue influence is that it is difficult to determine the quality of the relationship between the parties which can help determine abuse and undue influence and this area has not been sufficiently addressed by the decision of the court in Etridge; rather the presumption of influence in certain relationships is still continuing. One of the difficult aspects in undue influence cases from the perspective of the weaker party is that determining the occurrence or criteria of undue influence can pose challenges as seen in the case of Barclays Bank plc v O’Brien, wherein the court categorised undue influence as actual undue influence, presumed undue influence from a special relationship, and presumed undue influence arising from readily ascertainable facts. The challenge or difficulty arising from this categorization is that much is left to determination of the quality of the relationship and if the undue influence can be presumed to have arisen due to the relationship. This is an area that has not benefited from more clarification in the case of Royal Bank of Scotland v Etridge; rather, Nicholls LJ explained why more specific criterion cannot be laid down to establish where undue influence can be presumed writing that the "circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion.” The Etridge decision does not clarify the position in cases of presumed undue influence, and therefore, there is still reference to presumed undue influence which perpetuates the conception that particular relationships give rise to a presumption of undue influence.

The second problem with the doctrine of undue influence mentioned in the introductory part is that it is defendant centric with the emphasis of the court on the conduct of the defendant and not on the impaired consent of the plaintiff. On the other hand, the plaintiff focussed view is more focussed on the impact of the relationship of influence on the plaintiff, and not on the propriety of the defendant’s behaviour. In Etridge, this shift has been justified on the basis that the use of relationship between parties to base a presumption of undue influence on such a relationship would be impractical and therefore, something more is needed before the law reverses the burden of proof, something which calls for an explanation. This is the problem identified by Lord Nicholls in denying use of ‘manifest disadvantage’ because it is seen to be extreme position in relationships of marriage as then it can always be presumed that transactions as bad when wife undertakes onerous obligation while personally obtaining nothing in return. However, as mentioned above Etridge has not completely given up on the presumption of undue influence in certain kinds of relationships, which is clear from the way in which the courts have asked for banks to ensure due diligence by access to advice for the weaker party in a relationship. It has been argued that the emphasis on impaired consent of the plaintiff and abuse of trust by the defendant has been problematic because instead of helping to clarify and define the boundaries of undue influence, it has obfuscated them. However, the same argument is also extended to criticise the emphasis on a defendant centric approach, and it is argued that that one-dimensional view of undue influence is not appropriate as it is not able to clearly define undue influence, rather it is necessary that the doctrine of undue influence as it is used to regulate transactions between parties in a relationship of trust and confidence, should emphasise on the conduct and motivation of both parties to the relationship and the outcome of the transaction. This outcome is not achieved by the decision of the court in Etridge, and if anything the court has taken a defendant centric view as a shift over from the plaintiff centric view, rather than combining the two approaches to assess the transaction by having consideration to conduct of both the defendant and plaintiff.

The third problem with the doctrine of undue influence not addressed by Etridge is related to the presumption that undue influence does not take place if the weaker party in a contractual relationship has access to advice. To bring this into perspective, one of the key considerations in undue influence cases is whether there is a fiduciary relationship between the parties, which can give rise to the presumption of undue influence in cases of contracts that are particularly disadvantageous to the weaker parties. As mentioned earlier, presumed undue influence can arise in cases of special relationship, or some readily ascertainable facts. The burden of proof is on the stronger party which has to establish that the weaker party was not prevented from exercising freedom of will. In such cases, as reinforced in Etridge, the court can presume that freedom of will was exercised if it can be established that access to independent advice was available to the weaker party and was availed by them. In other words, access to independent advice is evidence in favour of the exercise of freedom of will. However, as the case of Etridge itself demonstrates, access to independent advice is not a guarantee that the plaintiff will arrive at the correct conclusion as to the viability of the action. In this case, homeowners had mortgaged their property to a bank, with the mortgages serving to secure loan used by a husband for his business, and not providing direct benefit to the wife and the businesses failing thereby leading to the claim of undue influence. This case demonstrates the problem with the objective criterion of access to advice being used to show that presumption works to deny undue influence on the basis of such advice because despite legal advice, the wife was not protected. This is recognised by the House of Lords in Etridge, where it notes that legal advice is not always going to be effective in emancipating a guarantor from influence. This led to one author noting that “the curious outcome of Etridge is that it is of least protection to the most vulnerable, those like Mrs Snee and Mrs Wilkinson for whom the legal advice could do no good”. It is further noted that there is no test for cases where lender ought to be suspicious as to the possibility of undue influence so that steps can be taken to resolve it.

Moreover, even where the solicitor may advice the weaker party, the question of the nature or quality of the advice is not particularly considered in Etridge although the court accepts that the solicitor may not always be independent and may be the solicitor of the lender concerned; the quality of the advice is then an important issue which is not addressed by Etridge. There can be a case where a competent solicitor could possibly not have advised such a transaction as seen in the case of Crédit Lyonnais Bank Nederland NV v Burch. In this case, the defendant was employed in a junior position, placing him under influence of a Mr Pelosi. The company wished to increase its overdraft by £20,000 for which the bank required security. The defendant had an equity of £70,000 in her flat and Mr Pelosi persuaded her to provide security for the overdraft by second charge over the flat to secure borrowing by the company. The Court of Appeal struck the transaction for being spectacularly disadvantageous. However, this was possible only because the court looked beyond the objective criterion of access to advice to see the manifest disadvantage to the defendant for establishing undue influence. Had the court not done so, a mere objective criterion of access to advice would have been inadequate to address the problem of undue influence writ large in the case facts.

This raises the question of the problem with the use of the objective test of access to advice as a presumption in favour of the defendant in cases of undue influence. The access to advice in Etridge was held by the House of Lords to be a determining point on whether exercise of free will can be established. It was held that if it is established that the parties were advised by the solicitor, this would be adequate to establish the presumption of exercise of free will. Based on this objective test of access to legal advice, the court allowed the bank to repossess the property. The presence of 'manifest disadvantage' which is used to establish undue influence in cases involving fiduciary relationships, being difficult to prove was not used in Etridge, with the House of Lords observing this this should be avoided and instead the emphasis should be on whether the transaction can be readily explained by the relationship of the parties. The principle of manifest disadvantage was applied in Allcard v Skinner, in which the court provided the test of explicability of the relationship of the parties giving rise to the possibility of manifestly disadvantageous transaction. However, as the House of Lords denied the application of this principle in Etridge, what becomes more pertinent is to see if the objective test of access to advice is satisfied. Therefore, as far as the bank is concerned, the responsibility is only limited to ensuring that there was access to legal advice. In Wright v Cherrytree Finance Ltd, the Court of Appeal held the bank’s responsibility in situations involving co-borrowers is limited to whether financial arrangements have been explained to the co-owner of the mortgaged property.

To conclude, the Etridge decision still leaves some issues or problems related to the doctrine of undue influence in the grey area. Of particular concerns are the shift from the plaintiff centric approach to the defendant centric approach instead of synthesising the two, the use of an objective test to assess legality of the transaction even if the objective approach is not completely adequate to safeguard the interests of the weaker parties to the transaction, and finally, the difficulties that are associated with the determination of the quality of the relationship between the parties which can help determine abuse and undue influence. These are the areas that have not been sufficiently addressed by the decision of the court in Etridge.

Take a deeper dive into Equity Will Not Perfect an Imperfect Gift with our additional resources.

Books

Davys M, Land Law (London: Palgrave Macmillon 2015).

Herring J, Vulnerable Adults and the Law (Oxford University Press 2016).

Len LKY, Minimum Contract Justice: A Capabilities Perspective on Sweatshops and Consumer Contracts (Hart Publishing 2017).

Journals

Allan B, ‘“Trust me, I'm Your Husband": Undue Influence and Royal Bank of Scotland v Etridge’ (2006) 11(2) Otago Law Review 247.

Chen-Wishart M, Burrows A, and Rodger A, ‘Undue Influence: Beyond Impaired Consent and Wrong-Doing, Towards a Relational Analysis’ (2006) Mapping the law 201.

Enonchong N, ‘Presumed Undue Influence: Continuing Misconceptions’ (2005) 121 LQR 29.