CIBC Mortgages plc v Pitt

The House of Lords dismissed the appeal. The court held that where a claimant proves actual undue influence, the transaction may be set aside as of right and there is no additional requirement to show the transaction was manifestly disadvantageous. However, a creditor is not affected by undue influence exercised by the debtor’s spouse unless the creditor either had actual or constructive notice of the undue influence or the husband was, in reality, acting as the creditor’s agent in procuring the wife’s agreement. Applying these principles, the court found actual undue influence by Mr Pitt on Mrs Pitt but held that CIBC Mortgages had no actual or constructive notice and Mr Pitt was not the bank’s agent; the charge therefore remained enforceable against Mrs Pitt.

Background and parties. The respondent lender sought possession of the matrimonial home charged under a legal charge executed by Mr and Mrs Pitt to secure a £150,000 loan made in July 1986. Mrs Pitt resisted enforcement, alleging she had been induced to execute the charge by her husband’s misrepresentations and actual undue influence.

Procedural posture. At first instance Mr Recorder Davies found actual undue influence by Mr Pitt but concluded the charge could not be set aside against the lender. The Court of Appeal dismissed Mrs Pitt’s appeal and the defendant appealed to the House of Lords.

Issues framed by the House of Lords. (i) Whether a claimant who proves actual undue influence must also show the transaction was manifestly disadvantageous; (ii) whether the lender could be affected by the husband’s undue influence absent actual or constructive notice or agency by the husband; and (iii) the legal distinction, if any, between joint loans to husband and wife and cases where a wife gives security as surety for her husband.

Reasoning. The House held that the requirement to show manifest disadvantage, as articulated in National Westminster Bank Plc v Morgan, applies to raising a presumption of undue influence (Class 2) but does not impose an additional burden where actual undue influence (Class 1) is proved: actual undue influence is analogous to fraud and the transaction can be set aside as of right. Nonetheless, a claimant seeking to set aside a transaction as against a third-party creditor must show the creditor is affected by the wrong: that occurs if the wrongdoer acted as the creditor’s agent or if the creditor had actual or constructive notice. The court distinguished loans that are joint advances for the parties’ mutual benefit from surety guarantees which, by their nature, put a creditor on inquiry. On the facts, the lender had no actual or constructive notice and Mr Pitt was not the lender’s agent, so the charge remained enforceable against Mrs Pitt.

Relief sought. Mrs Pitt sought to prevent possession and to set aside the legal charge against the lender. The House refused that relief as against the lender, affirming the Court of Appeal.

Appeal dismissed. The House held that actual undue influence need not be proved to be manifestly disadvantageous; a transaction procured by actual undue influence can be set aside as of right as against the wrongdoer. However, a creditor is not affected by the wrongdoer’s undue influence unless the wrongdoer was acting as agent for the creditor or the creditor had actual or constructive notice. On the facts the lender had no such notice and Mr Pitt was not the lender’s agent, so the bank could enforce the charge.

First instance: Trial before Mr Recorder Davies (finding actual undue influence by Mr Pitt). Court of Appeal: dismissed Mrs Pitt's appeal (Order of 31 March 1993). House of Lords: appeal dismissed [1993] UKHL 7 (21 October 1993).