House of Lords
Session 1997-98
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Judgments - Smith v. Governor and Company of the Bank of Scotland


Lord Goff of Chieveley  Lord Jauncey of Tullichettle   Lord Lloyd of Berwick
Lord Hoffmann  Lord Clyde






ON 12 JUNE 1997


My Lords,

      I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Clyde. For the reasons which he gives I would allow this appeal.


My Lords,

      In this appeal the appellant, a wife, seeks to reduce a standard security granted by her and her husband over the matrimonial home whose title was in their joint names. The standard security was granted in favour of the Bank of Scotland, the respondents, to enable the husband to obtain overdraft facilities for a partnership of which he was a member. The wife was thus in the position of a cautioner for the partnership. The sole ground of reduction relied upon is material representation by her husband as to the purpose of the standard security. She avers that she relied upon her husband to make financial decisions and that she was advised neither by the bank nor their solicitors that she should obtain independent legal advice.

      At the time when the First Division refused the wife's reclaiming motion from the interlocutor of the Lord Ordinary, Lord Johnston, dismissing the action the law of Scotland relative to the issue may be summarised as follows:

(1) A contract of caution although not a contract uberrimae fidei, requires perfect fairness of presentation by the creditor otherwise it cannot be enforced (Bell's Principles of the Law of Scotland, 10th ed. (1899), p. 110, para 251, Gloag and Irvine's Law of Rights in Security (1897), at p. 706). In practical terms this means that the creditor must disclose to an intending cautioner circumstances known to him which are material to the risk to be undertaken but which are unlikely to be known to the cautioner. Furthermore in so far as the creditor discloses information to the cautioner whether voluntarily or upon request, he must not mislead by inaccurate or partial disclosure (Gloag and Irvine, at p. 708 et seq). A creditor must not put his head in the sand. If he is aware of circumstances which suggest that the transaction is tainted with fraud he cannot abstain from further enquiry because of the risk of discovering what the true position may be. Wilful ignorance in such circumstances becomes equivalent to knowledge. (Owen and Gutch v. Homan (1853) 4 H.L. C. 997, discussed in Gloag and Irvine, at p. 712).

(2) Subject to (1) supra it is well settled that a creditor is under no duty to an intending cautioner to give information as to the debtor's state of indebtedness and he is entitled to assume that the cautioner has informed himself as to the matters material to the obligation which he is about to undertake. (Young v. Clydesdale Bank Ltd. (1889) 17 R. 231, Lord Adam at p. 240, Lord Shand at p. 244).

(3) The doctrine of undue influence was received from England into Scots law in Gray v. Binny (1879) 7 R. 332. In Fraser v. Fraser's Trustees (1834) 13 S. 703 which concerned a dispute between a son and his father's trustees Lord President, Lord Hope, at p. 710 in the course of his charge to a jury pointed out that in contracts between parent and child and husband and wife "everything ought to be done as fairly, equally, openly, and candidly as possible." In McKechnie v. McKechnie's Trustees, 1908 S.C. 93, which concerned the alleged impetration of a will in her favour by a mistress of long standing Lord Justice Clerk McDonald, at p. 98, considered that the rule of undue influence did not apply to a close relationship such as that of husband and wife since such persons were entitled to use influence to induce a man to make provision for someone whom he had placed in the position of being dependent on him. It is probable that the Lord Justice Clerk did not have contracts in mind at the time. However, Lord Low, at p. 102, went further and expressed the general view that the relationship existing between a man and a woman who lived together was not of the kind to admit of application of the doctrine of undue influence. No case was cited to your Lordships in which the doctrine had been applied in such a situation. Furthermore in no case since Gray v. Binny has a contract been reduced when the undue influence has not been exercised by or on behalf of the other party to the contract. So stated Lord Guthrie in Forbes v. Forbes's Trustees, 1957 S.C. 325, 333 and the position has not since altered.

(4)      Just as a contract between A and B is reducible by A where B has exerted undue influence in the circumstances described in Gray v. Binny so is it reducible where B by misrepresentation has induced A to contract. There appears to be no Scottish case in which A has been held entitled to reduce a contract on the ground of misrepresentation by C who was not acting as B's agent.

      The foregoing summarised propositions are discussed in much greater detail in the speech of my noble and learned friend Lord Clyde which I have had the advantage of reading. They represent the law of Scotland as it was at the time of the First Division hearing and approximate closely to the law of England as it was prior to October 1993 when Barclays Bank Plc. v. O'Brien [1994] 1 A.C. 180 was decided. In that case a wife executed a second mortgage of the joint matrimonial home in favour of a bank as security for overdraft facilities extended to a company in which the husband alone had an interest. As in this case she was not separately advised and claimed that her husband had misrepresented the effect of the transaction. This House decided that the bank had constructive notice of the wrong which entitled the wife to set aside the transaction against the husband. Lord Browne-Wilkinson observed, at p. 190C, that where a wife could demonstrate that the relationship between herself and her husband was such that she reposed confidence and trust in her husband in relation to their financial affairs undue influence exerted by the husband was to be presumed without proof of actual exertion. Although Lord Browne-Wilkinson was here referring only to undue influence it is clear from consideration of his speech as a whole that he was equating misrepresentation thereto. He then went on to point out that the wife's equity to set aside the transaction against the husband would also be enforceable against the creditor who had actual or constructive notice of the husband's wrong. At p. 196A-B his Lordship said:

    "Therefore where a wife has agreed to stand surety for her husband's debts as a result of undue influence or misrepresentation, the creditor will take subject to the wife's equity to set aside the transaction if the circumstances are such as to put the creditor on inquiry as to the circumstances in which she agreed to stand surety."

And he went on to say at p. 196D-F:

    "Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife: and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction."

Lord Browne-Wilkinson, at p. 198, then applied the principles which he had enunciated in relation to husbands and wives to co-habitees whether of the same or opposite sexes.

      My Lords the decision in Barclays Bank Plc. v. O'Brien undoubtedly extended the law of England in favour of sureties co-habiting with a principal debtor. It did so by fixing the creditor with constructive notice of the risk of undue influence or misrepresentation by the debtor. The difficult question in this appeal is whether a similar extension should be made to the law of Scotland. By clothing the creditor with constructive knowledge English law appears to accept that there is a presumption that a husband in circumstances such as the present is likely to exercise undue influence over or misrepresent to his wife. No such presumption as to undue influence presently exists in Scotland although there will be cases in which an inference may without difficulty be drawn from the particular facts (Professor Walker's Law of Contracts and related Obligations in Scotland, p. 306, para. 15.26). Misrepresentation seems to me to be even less likely to lead to a presumption although it is treated in the same way as undue influence in O'Brien. On one view a non co-habiting principal debtor might be thought to have even more incentive to misrepresent than a co-habiting one who would sooner or later have to face the music at close quarters and perhaps for a prolonged period when the truth was out.

      My Lords while I can follow the policy reasons for clothing a creditor with constructive knowledge of the risk of undue influence by a husband in the special circumstances of a cautionary obligation I have the greatest difficulty in seeing why such constructive knowledge should extend to misrepresentation. There has so far as I am aware never been any suggestion in the law of Scotland that any particular class of persons is more likely to misrepresent in relation to a contract than any other class. Applying the principles of Scots law alone I would therefore have been disposed to dismiss this appeal. Nevertheless I am conscious that your Lordships do not share my difficulties and I appreciate the practical advantages of applying the same law to identical transactions in both jurisdictions. In these circumstances I do not feel able to dissent from your Lordships' view that the appeal should be allowed.

      I would however make two further points. In the first place it is not difficult to conceive of other situations in which a wife enters into a contract with a third party which is to her financial disadvantage but is to the apparent advantage of her husband. I would demur to any suggestion that the other party to the contract should be clothed with constructive knowledge of the risk of the husband having exerted undue influence over or misrepresented the nature or purpose of the transaction to the wife. As I have already observed a cautionary obligation involves certain special requirements which are not present in other contracts. The policy considerations referred to by Lord Browne-Wilkinson in O'Brien [1994] 1 A.C. 180, 188 relate solely to surety obligations and the joint ownership of matrimonial homes. In these circumstances as at present advised I would resist any attempt to extend the concept of constructive knowledge embodied in O'Brien to other types of contracts between a wife and a third party. In the second place when it is apparent from the terms of the transaction that the cautioner and principal debtor are, as here, husband and wife or that they are co-habiting as for example by living at the same address the creditor should take the steps suggested by my noble and learned friend, Lord Clyde. However if the creditor has no information to suggest that cautioner and principal debtor are co-habiting I do not consider that he is under any obligation to make enquiries thereanent. Furthermore the degree of non-marital co-habitation which can give rise to constructive notice must be a matter for decision in each individual case.


My Lords,

      I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Clyde. For the reasons which he gives I too would allow this appeal.


My Lords,

      I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Clyde. For the reasons which he gives I would allow this appeal.


My Lords,

      The Pursuer and Appellant in this appeal seeks reduction of a Standard Security which she and her husband executed in favour of the Bank of Scotland who are the Respondents ("the bank"). The ground on which she seeks reduction is that she was induced to sign the deed as a result of misrepresentations by her husband. The security was granted over the matrimonial home which was owned jointly by herself and her husband. The husband required the security for the purposes of enabling him to obtain a loan for a business which he ran in partnership with another. The case proceeds on the basis of fact that the bank manager knew that the grant of the Standard Security was over a dwelling house which was the matrimonial home of the pursuer and her husband, that the grant was not to the financial advantage of the pursuer, that it was in security of the pursuer's husband's business debts and that the pursuer had no involvement nor interest in that business. The pursuer and her husband signed the security documents at the office of the bank's solicitors, but she was given no opportunity of perusing the document, was not given a copy of it and was not given nor advised to obtain any independent advice. She alleges that she was induced to sign the Standard Security as a result of misrepresentations by her husband to the effect that she required to sign as his wife in order for him to receive a loan and that her personal assets were not at risk. It is said that she relied upon her husband to make financial decisions within the family.