Barclays Bank plc v O'Brien

The House of Lords held that where a person (for example a wife) is induced to stand as surety for a cohabitee's debts by undue influence, misrepresentation or other legal wrong of the principal debtor, the creditor will take subject to the surety's equity if the creditor had actual or constructive notice of those facts. The court rejected the creation of a special equity applicable only to wives; instead it applied orthodox equitable principles of notice and inquiry. A creditor is put on inquiry where (a) the transaction is, on its face, not to the financial advantage of the surety and (b) there is a substantial risk that the principal debtor has committed a legal wrong in procuring the surety. Reasonable steps to avoid constructive notice normally require a private interview with the surety (without the principal debtor) explaining the extent of liability, warning of the risks and urging independent legal advice.

This appeal concerned possession proceedings brought by Barclays Bank to enforce a legal charge on the O'Briens' matrimonial home. Mrs O'Brien sought to set the charge aside on the ground that she was induced to execute it by her husband's misrepresentation and undue influence (she alleged only misrepresentation in the House of Lords). At first instance the trial judge found a misrepresentation by Mr O'Brien but held the bank not responsible and granted possession. The Court of Appeal reversed, holding the bank could not enforce the charge except to the extent of the amount Mrs O'Brien thought she was securing.

The House of Lords considered (i) whether a special equity should be recognised to protect wives (or similar persons) in surety transactions, (ii) whether the relevant prior authorities (notably Turnbull & Co v Duval) required that approach, and (iii) how the ordinary equitable doctrine of notice applies to such cases. The court rejected a special equity limited to wives and instead restated the law on the basis of equitable notice. It held that a creditor is put on inquiry where the transaction appears not to be to the surety's financial advantage and there is a substantial risk of undue influence, misrepresentation or other legal wrong by the principal debtor. The creditor must take reasonable steps to avoid constructive notice; ordinarily this requires a private interview with the proposed surety, clear explanation of the extent of liability, warning of the risks, and advice to obtain independent legal advice.

Applying these principles, the House of Lords held the bank had constructive notice because branch staff failed to follow instructions to inform Mrs O'Brien properly and to recommend independent advice; accordingly the bank was fixed with constructive notice of Mr O'Brien's misrepresentation and the charge was unenforceable as against Mrs O'Brien. The bank's appeal was dismissed and the Court of Appeal's order was affirmed.

Appeal dismissed. The House of Lords rejected the adoption of a discrete special equity for wives and instead applied the ordinary equitable doctrine of notice. A creditor is put on inquiry where the surety transaction is not to the surety's financial advantage and where there is a substantial risk that the principal debtor has exercised undue influence, misrepresented or otherwise wronged the surety; the creditor must take reasonable steps (normally a private meeting with the surety, explanation of liability and advice to seek independent legal advice) to avoid constructive notice. On the facts the bank failed to take such steps and was fixed with constructive notice of the husband's misrepresentation, so the charge could be set aside as against Mrs O'Brien.

First instance: Trial before Judge Marder QC who found a misrepresentation by Mr O'Brien but held the bank was not responsible and granted possession. Court of Appeal: Purchas, Butler-Sloss and Scott LJJ ([1992] 4 All ER 983; [1993] QB 109) reversed and held the bank could not enforce the charge except to the extent Mrs O'Brien thought she was securing. House of Lords: appeal dismissed ([1993] UKHL 6), affirming the Court of Appeal.