Barclays Bank plc v OBrien and another

Bank loan — Wife charged her share of home at request of husband — Husband misrepresented to her that charge limited to £60,000 — In fact charge was for much larger sum — Court of Appeal holding wife’s liability limited to £60,000 — House of Lords holding that bank should have been put on inquiry as to circumstances in which wife agreed to stand as surety for husband’s debt — Appeal dismissed — Judgment in favour of wifeA husband wished to obtain a bank loan and persuaded his wife to charge her share of the matrimonial home as security for the loan. He misrepresented to her that the charge was limited to £60,000 in total and was for a few weeks only. In fact the loan was for a long term and the charge amounted to £135,000. A question rose whether the wife was liable for the whole sum due under the charge. The Court of Appeal held that she was only liable for £60,000. The bank appealed. Held The appeal was dismissed. 1. Where one cohabitee entered into an obligation to stand as surety for the debts of the other cohabitee, and the creditor was aware that they were cohabitees, the surety’s obligation would be valid and enforceable by the creditor unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor. 2. If there was undue influence, misrepresentation or other legal wrong by the principal debtor, unless the creditor had taken reasonable steps to satisfy himself that the surety entered into the obligation freely and knowing the true facts, the creditor would be fixed with constructive notice of the surety’s right to set aside the transaction. 3. Unless there were special exceptional circumstances, a creditor would have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warned the surety (at a meeting not attended by the principal debtor) of the amount of her potential liability and of the risks involved and advised the surety to take independent legal advice. 4. In referring to the husband’s debts their lordships included the debts of a company in which the husband, but not the wife, had a direct financial interest. 5. Applying those principles to the present case, to the knowledge of the bank the respondents were man and wife. The bank took a surety obligation from the wife, secured on the matrimonial home, to secure the debts of a company in which the husband was interested but in which the wife had no direct pecuniary interest. The bank should therefore have been put on inquiry as to the circumstances in which the wife had agreed to stand as surety for her husband’s debt. 6. Unfortunately the bank manager’s instructions were not carried out and to the knowledge of the bank (through a bank clerk) the wife signed documents without any warning of the risks or any recommendation to take legal advice. In those circumstances the bank was fixed with constructive notice of the wrongful misrepresentation made by the husband to the wife. The wife was therefore entitled as against the bank to set aside the legal charge on the matrimonial home securing her husband’s liability to the bank. John Jarvis QC, William Blair and Ross Cranston (instructed by Lovell White Durrant) appeared for the bank; Simon Buckhaven and Bernard Devlin (instructed by Cathcart & Co, of Ickenham) appeared for the wife.