CIBC Mortgages plc v Pitt

Proof of actual undue influence entitles the victim, as against the wrongdoer, to set aside the resulting transaction as of right. Manifest disadvantage is not an additional requirement. It is relevant when disadvantage is relied upon to raise a presumption of undue influence.

An innocent lender is affected only where the wrongdoer acted as its agent or it had actual or constructive notice of the undue influence. A routine joint advance to spouses for their apparent joint benefit does not, without more, put the lender on inquiry. A wife’s guarantee of her husband’s debts differs because the possibility of influence is combined with an apparent absence of financial benefit to her.

The respondent lender sought possession of the matrimonial home under a legal charge securing a £150,000 joint loan to Mr and Mrs Pitt. The trial judge found that Mr Pitt had procured Mrs Pitt’s agreement through actual undue influence, but that he had not acted as the lender’s agent. The judge nevertheless ordered possession.

The Court of Appeal dismissed Mrs Pitt’s appeal. It held that the transaction was not manifestly disadvantageous and that the lender had neither actual nor constructive notice of the undue influence.

The central questions before the House were whether manifest disadvantage was required where actual undue influence had been proved and whether the apparently routine joint advance put the lender on inquiry so that Mr Pitt’s wrongdoing affected the enforceability of its charge.

Appeal dismissed unanimously. Lord Browne-Wilkinson delivered the leading speech. Lord Templeman, Lord Lowry, Lord Slynn of Hadley and Lord Woolf agreed with it.

1. Per Lord Browne-Wilkinson, actual undue influence is a species of fraud. It prevents the victim from bringing a free will and properly informed mind to the transaction. Once actual undue influence is proved, the victim is entitled as against the wrongdoer to have the transaction set aside as of right. There is no additional requirement to prove that the transaction was manifestly disadvantageous.

2. The manifest-disadvantage requirement in National Westminster Bank Plc v Morgan [1985] AC 686 concerned the raising of a presumption of undue influence. It did not establish such a requirement for proved actual undue influence. The contrary extension in Bank of Credit and Commerce International SA v Aboody [1990] 1 Q.B. 923 was erroneous and was not followed.

3. Mrs Pitt could therefore set aside the transaction against Mr Pitt. To defeat the lender’s charge, however, she also had to show that Mr Pitt acted as the lender’s agent or that the lender had actual or constructive notice of his wrongdoing. Applying the House’s decision in Barclays Bank Plc v O’Brien, neither condition was satisfied.

4. The relationship of husband and wife does not by itself put every third party dealing with them on inquiry. A wife’s guarantee of her husband’s debts combines the possibility of influence with an increased risk that it was exercised, because the transaction appears not to benefit her financially. The present transaction appeared to the lender to be a routine joint advance for the spouses’ joint benefit. The lender was therefore not put on inquiry and was entitled to enforce its charge.

5. Lord Browne-Wilkinson observed that the relationship between presumed undue influence and the public-policy rules governing transactions by fiduciaries remained obscure. The appeal was dismissed and the Court of Appeal’s order affirmed. The respondents’ costs were ordered to be paid from the Legal Aid Fund under section 18 of the Legal Aid Act 1988, subject to the Legal Aid Board’s opportunity to object.

1. House of Lords: Dismissed Mrs Pitt’s appeal unanimously and affirmed the Court of Appeal’s order.
2. Court of Appeal: Dismissed the appeal. It held that the transaction was not manifestly disadvantageous and that the lender had neither actual nor constructive notice of the undue influence.
3. Trial: Mr Recorder Davies found actual undue influence by Mr Pitt, found no misrepresentation and no agency between Mr Pitt and the lender, and ordered possession of the property.