On 31st July the Court of Appeal delivered judgment in the case of Royal Bank of Scotland v Etridge (No.2) and other appeals which unfortunately was not reported until the end of November. The Court of Appeal took the opportunity to review the case law since the House of Lords decision in Barclays Bank plc v O'Brien and to try and weld that case law into a coherent set of rules for lenders and their advisors to follow. As is typical in these cases the wife had charged her share of the matrimonial home as security for her husband's business debts to the bank. The Court of Appeal set down the following principles
The result of this case will be to help stem the flood of cases involving O'Brien defences. Inevitably as one door closes another one opens. Etridge opens not one door but two. Firstly, Etridge highlights that wives can always sue their lawyer for negligent advice.
The Court of Appeal did however give lawyers some guidelines as to the sort of advice they should be giving. The lawyer should advise the wife that she is not obliged to enter into the transaction, if the guarantee or security is "all monies" or unlimited, that she has no control over the extent of the liability as the bank could lend more without telling her, and the lawyer should inform the wife of alternatives open to her such as limiting the guarantee or charge and negotiating with the bank on her behalf. The Court of Appeal recommends that the lawyer obtain some basic information about the transaction from the bank.
This information should include the circumstances of the proposed transaction, the current level of indebtedness, the amount of the proposed increase, the reason why the increase is required and why security is now being requested from the wife.
The second issue raised by the Court of Appeal is that of disclosure. If the bank does not disclose material information known to it which could have affected the lawyer's advice then the security taken from the wife is at risk. Banks should put in place procedures so that a standard information pack is sent to the wife's lawyer. Whilst the classic O'Brien defence may not be used as often it is likely that over the next couple of years this non-disclosure argument will become increasingly popular as a way of trying to avoid security and guarantees.
For further information please contact Gwen Griffiths, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Winter 1998/1999 Hammond Suddards Banking Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
- If the wife receives legal advice it does not matter who paid the lawyer or gave the instructions to the lawyer, the bank is "ordinarily" not put on inquiry and entitled to assume that the lawyer gave the wife appropriate advice. The wife will not be entitled to have the security set aside as against the bank but could still sue her lawyer for negligent advice.
- There is one very significant exception. "If the bank is in possession of material information which is not available to the solicitor, or if the transaction is one which no competent solicitor could properly advise the wife to enter, the availability of legal advice is insufficient..."
- If the wife does not receive legal advice it will normally be sufficient (to avoid the security being set aside as against the bank) if the bank has urged her to obtain independent legal advice particularly if a lawyer confirms he explained the transaction to her (without advising on the merits) and she appeared to understand it.
- Solicitors advising wives undertake a significant responsibility. They may even need to ask the wife about the stability of the marriage as part of giving advice.
The result of this case will be to help stem the flood of cases involving O'Brien defences. Inevitably as one door closes another one opens. Etridge opens not one door but two. Firstly, Etridge highlights that wives can always sue their lawyer for negligent advice.
The Court of Appeal did however give lawyers some guidelines as to the sort of advice they should be giving. The lawyer should advise the wife that she is not obliged to enter into the transaction, if the guarantee or security is "all monies" or unlimited, that she has no control over the extent of the liability as the bank could lend more without telling her, and the lawyer should inform the wife of alternatives open to her such as limiting the guarantee or charge and negotiating with the bank on her behalf. The Court of Appeal recommends that the lawyer obtain some basic information about the transaction from the bank.
This information should include the circumstances of the proposed transaction, the current level of indebtedness, the amount of the proposed increase, the reason why the increase is required and why security is now being requested from the wife.
The second issue raised by the Court of Appeal is that of disclosure. If the bank does not disclose material information known to it which could have affected the lawyer's advice then the security taken from the wife is at risk. Banks should put in place procedures so that a standard information pack is sent to the wife's lawyer. Whilst the classic O'Brien defence may not be used as often it is likely that over the next couple of years this non-disclosure argument will become increasingly popular as a way of trying to avoid security and guarantees.
For further information please contact Gwen Griffiths, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000
This article was first published in the Winter 1998/1999 Hammond Suddards Banking Newsletter
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
