Chater v Mortgage Agency Services Number Two Ltd

In a parent-and-child transaction, trust and confidence and a transaction calling for an explanation may establish presumed undue influence. The transaction need not be inexplicable only on that basis. A lender is put on inquiry only by information available to it which indicates that an equitable wrong may have occurred. A joint loan secured on a parent’s home is not, without more, enough. Where the transaction reasonably appears to be a joint domestic advance, the lender may rely on that appearance. The duty to take reasonable protective steps arises only after the lender is put on inquiry.

The appellant mortgaged her home jointly with her son to obtain finance. The money was used for his laser-printing business. The mortgage fell into arrears, and possession proceedings followed.

The county court judge found trust and confidence, undue influence, misrepresentation and constructive notice, but dismissed the appellant’s claim because he considered the solicitors’ involvement sufficient under the law then understood. Following Royal Bank of Scotland Plc v Etridge (No.2) [2001] UKHL 44, the Court of Appeal considered whether undue influence was established, whether the lender was put on inquiry, and whether reasonable protective steps were required.

1. Appeal dismissed. The appellant was induced to enter the mortgage by undue influence, but the respondent lender was not put on inquiry as to any equitable wrong and was consequently under no obligation to take further steps.
2. For presumed undue influence, the court applied the reformulated approach in Royal Bank of Scotland Plc v Etridge (No.2) [2001] UKHL 44. Proof of trust and confidence in relation to management of the claimant’s financial affairs, coupled with a transaction calling for an explanation, ordinarily shifts the evidential burden. The court preferred that approach to the higher formulation attributed to National Westminster Bank Plc v Morgan [1985] AC 686.
3. The transaction called for an explanation. It exposed the appellant to a long mortgage, increasing debt, joint ownership, and the loss of her equity, while the stated loan purpose did not match its true purpose. No satisfactory explanation was given, so undue influence was established.
4. The alleged misrepresentations were not causative. The evidence did not establish a representation that the loan was fully insured, and the representation concerning the loan amount was not shown to have caused a false impression about a material matter.
5. The inquiry issue depended on information available to the lender. The application was for a joint loan, and nothing indicated that the advance was solely for the son’s business. A lender was not required to investigate every possible equitable wrong and was not put on inquiry merely because the parties were mother and son or the mother’s property secured the loan.
6. The question of reasonable steps did not arise. The appellant’s later conduct in litigation against her son did not defeat the claim; the point had not been pleaded or argued below.

• Court of Appeal (Civil Division): The appeal from the Dudley County Court was dismissed.
• Dudley County Court: Judge Warner made an order for possession and entered judgment for £63,501.18 against the appellant and her son. The appellant’s claim failed under the law as then understood, despite findings favourable to her on undue influence, misrepresentation and constructive notice.