Barclays Bank plc v Boulter

A party seeking to avoid a charge because of a third party’s undue influence or misrepresentation bears the initial burden of showing that the lender had actual or constructive notice of the wrongdoing. In a husband-and-wife transaction, that burden is discharged by showing that the lender knew they were living together and that the transaction was apparently disadvantageous to the wife. The lender must then show that it took reasonable steps to ensure that her consent was properly obtained.

Constructive notice is a legal conclusion. A pleading may therefore be technically sufficient if it states every material fact supporting that conclusion. Pleadings must nevertheless give fair notice of the case. Inferential or concealed allegations will ordinarily be inadequate, although an amendment may be unnecessary where the opponent already knows the case fully and can meet it without prejudice.

A bank sought possession of a matrimonial home under an all-monies legal charge executed by a husband and wife. The wife alleged that her husband had procured her signature through undue influence and a misrepresentation that the charge secured only the house-purchase loan. Her defence pleaded agency and the underlying facts but did not expressly allege that the bank had constructive notice.

A county court judge held that constructive notice required an amendment. The Court of Appeal, reported at [1998] 1 WLR 1, held that the material facts had been pleaded and that no amendment was necessary. It also held more broadly that the bank bore the burden of proving absence of notice.

The issues before the House were whether the existing pleading sufficiently raised constructive notice and which party bore the burden of proving notice of third-party wrongdoing.

1. Appeal dismissed unanimously. Lord Hoffmann delivered the leading speech. Lord Slynn of Hadley, Lord Nolan, Lord Steyn and Lord Hutton agreed with his reasoning and disposition. Although the Court of Appeal’s wider reasoning on the burden of proof was wrong, its conclusion that no amendment was required in the exceptional circumstances was upheld.
2. Per Lord Hoffmann, constructive notice is a conclusion of law. A party who pleads every fact which gives rise to constructive notice may therefore argue its legal consequences without pleading the conclusion expressly. Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974 was applied. Such a course remains undesirable where it could take the opposing party by surprise.
3. Pleadings must define the issues and give fair notice of the case to be met. Allegations concealed within, or inferentially derived from, documents will ordinarily be inadequate. This case was exceptional because the earlier hearing had made the constructive-notice defence clear, the bank knew that it was the wife’s only practical defence, and the bank was ready to meet it without an adjournment. Reading the pleading against that known background, no amendment was required.
4. Per Lord Hoffmann, the Court of Appeal erred in placing the general burden on the bank to disprove notice. A person seeking to invalidate a charge granted directly to a lender because of a third party’s undue influence or misrepresentation must establish that the lender was affected by the wrongdoing. The bona fide purchaser rule considered in In re Nisbet and Potts’ Contract [1905] 1 Ch 391 was distinguishable because this case involved no prior equitable proprietary interest. The approach in Whitehorn Brothers v Davison [1911] 1 KB 463, Bainbrigge v Browne (1881) 18 Ch D 188 and C.I.B.C. Mortgages Plc v Pitt [1994] AC 200 accorded with principle.
5. In the husband-and-wife context identified in Barclays Bank Plc v O’Brien [1994] AC 180, the wife’s initial burden is readily discharged by showing that the bank knew she was living with her husband and that the transaction was apparently not to her financial advantage. The bank must then show that it took reasonable steps to ensure that her consent was properly obtained. Ord. 18, rr. 8(2) and 12(4) of the Rules of the Supreme Court did not impose a greater pleading requirement or convert constructive notice from a legal conclusion into an allegation of fact.

• House of Lords: Dismissed the bank’s appeal unanimously. It upheld the conclusion that no amendment was required, but rejected the Court of Appeal’s wider ruling that the bank bore the initial burden of disproving notice.
• Court of Appeal: In [1998] 1 WLR 1, held that the wife had pleaded the material facts necessary to argue constructive notice and required no express allegation of the legal conclusion. It also held that the bank bore the burden of proving absence of notice.
• County Court: His Honour Judge Simmons ruled that the wife could not rely upon constructive notice without amending her defence. The wife declined to amend and obtained permission to appeal from the Court of Appeal.
• Earlier County Court appeal: Mr Recorder Breen set aside the possession order against the wife so that she could advance her separate defence based on undue influence, misrepresentation and constructive notice.