Royal Bank of Scotland v Etridge (AP)

The House of Lords reviewed and clarified the law governing undue influence and the obligations of lenders and solicitors in suretyship transactions where an individual (commonly a wife) charges her interest in the matrimonial home to secure another's borrowing. The court reaffirmed and refined the principles in Barclays Bank Plc v O'Brien and CIBC Mortgages Plc v Pitt: where a creditor is "put on inquiry" (for example whenever a non-commercial surety provides security for another's debts) the creditor must take reasonable steps to ensure the guarantor understands the nature and effect of the transaction and is urged to obtain independent legal advice. Section 199 of the Law of Property Act 1925 was applied to distinguish when a solicitor's knowledge can be imputed to a bank. The opinion set out practical, minimum steps for lenders (direct communication with the potential guarantor, disclosure of relevant financial information to the guarantor's solicitor, and a written confirmation from a solicitor acting for the guarantor) and clarified the content and scope of the solicitor's retainer when advising a guarantor.

This group of eight consolidated appeals arose from transactions in which wives charged their interests in homes as security for debts of husbands or companies controlled by husbands; banks sought possession when the debts defaulted. The House considered (i) whether the wives had been induced by undue influence or misrepresentation, (ii) whether banks were "put on inquiry" and therefore subject to constructive notice, and (iii) what steps banks and solicitors must take to avoid being fixed with notice.

Background and procedure: seven appeals raised the bank v guarantor issues and one was a wife v solicitor negligence claim. The cases reached the House after interlocutory and full-trial determinations in lower courts, including the Court of Appeal decisions (notably Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705). The House examined first principles of undue influence, the evidential role of presumptions (including the distinction between actual and presumed undue influence), and the practical scheme laid down in O'Brien for protecting vulnerable guarantors while allowing commercial lending to proceed.

• Nature of relief sought: wives sought to resist enforcement of charges on grounds of undue influence/misrepresentation; in one appeal a wife sued her solicitor for negligent advice.
• Issues framed: (a) whether on the facts undue influence or misrepresentation was proved; (b) whether the bank was put on inquiry and, if so, whether it took reasonable protective steps; (c) what advice a solicitor must give and whether the solicitor's knowledge can be imputed to the bank.
• Court’s reasoning: the House emphasised that the evidential presumption of undue influence is rebuttable and remains an evidential tool; it rejected treating husband-wife relationships as automatically giving rise to an irrebuttable presumption. A simple, practicable rule was preferred: in essentially all non-commercial cases the creditor is put on inquiry when a guarantor stands security for another, and reasonable steps are required to ensure the guarantor understands the consequences. The court described the "core minimum" content of solicitor advice, clarified that the solicitor acts for the guarantor (not the bank) when giving that advice, and limited the circumstances in which a solicitor’s knowledge may be imputed to the bank (notably where the solicitor never became the guarantor's solicitor and acted solely for the bank).

The House applied these principles to the eight appeals, allowing some (notably Wallace, Bennett, Harris, Moore and the solicitor-defendant Desmond Banks & Co in the negligence appeal) and dismissing others (notably Etridge, Gill and Coleman) for reasons set out in the opinions. The judgments emphasised the need for clear, practicable minimum steps that lenders and advisers should follow to balance protection of vulnerable guarantors and the legitimate needs of lending.

This is an appellate judgment resolving eight related appeals. The House clarified that a creditor is "put on inquiry" in non-commercial surety cases and must take reasonable steps to ensure the guarantor understands the nature and effect of the transaction and is advised to obtain independent legal advice; this will ordinarily be satisfied by direct communication with the guarantor, provision of relevant financial information to the guarantor's solicitor, and written confirmation from a solicitor acting for the guarantor. The court affirmed that the evidential presumption of undue influence is rebuttable and refined the role of solicitors and the limited circumstances in which a solicitor's knowledge may be imputed to the bank under s.199 LPA 1925. Applying these principles, the House allowed the appeals in Wallace, Bennett, Harris, Moore and in the solicitor negligence appeal (Desmond Banks & Co), and dismissed the appeals in Etridge, Gill and Coleman, for the reasons given in the speeches (notably those of Lords Nicholls, Scott and Hobhouse).

These appeals came from interlocutory and trial decisions in the High Court and from the Court of Appeal (see Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705 and related Court of Appeal reports). Several matters had been decided at trial and on appeal before being brought to the House of Lords for final determination on 11 October 2001.