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Banking - Independent Legal Advice

Summary

A solicitor who is too closely associated with the borrower cannot be assumed to be able to give independent legal advice to a third party chargor so as to negate actual or possible undue influence exercised against the third party chargor to obtain the charge.

Dramatis Personae

National Westminster Bank Plc ("Nat West")            Mr Breeds ("Mr B")
Mushroom Books Ltd ("the Company")                      Mrs Breeds (" Mrs B")
Mr Boundy

Facts

Mr B and a Mr Fletcher ran the Company and Mr Boundy was the company secretary and a solicitor. The Company banked with Nat West and in 1985 sought an increase of its overdraft facility. Nat West agreed to grant this on condition that, amongst other things, Mr B and Mrs B gave Nat West a second legal charge over their home. Nat West stipulated that Mrs B must receive independent legal advice prior to signing the charge. Accordingly Nat West received a charge executed by Mr and Mrs B and confirmation that Mr Boundy had advised Mrs B as to the meaning and effect of the charge prior to her execution of it. Nat West duly extended the Company's overdraft.

So far so good.

Of course the Company's business failed and Nat West took steps to enforce the charge that Mr and Mrs B had granted. Naturally Mrs B claimed that she had only executed the charge as a result of undue influence and fraud by Mr B. However, Nat West replied that, even if that were the case, as Mrs B had been advised by an independent solicitor prior to executing the charge Nat West could not be said to have notice of any undue influence or fraud upon her.

A pretty good argument.

However, Mrs B responded that Mr B was not an independent solicitor as he was very involved in the Company's affairs, and particularly the financial affairs, as the secretary of the Company. She also said that Nat West knew this and also that the Company was desperate for more money and the financial future of the Company was not at all bright. As a result, Mrs B said that Mr Boundy had a conflict of interest and could not possibly have properly and independently advised her and Nat West knew this.

A bit worrying.

Nat West relied on the principle that it was entitled to assume that a solicitor would judge for him/herself whether he/she was in a position to give independent legal advice to a third party considering executing a charge and did not itself have to enquire into the independence of the solicitor.

The Decision

On appeal from the County Court, in which the case was decided in Nat West's favour, the judgment in the High Court was that Nat West could not enforce the charge against Mrs B.

The High Court was at pains to emphasise that the decision was based on the particular facts in this case. These took it out of the ordinary run of cases where, if there might be a possibility of a conflict of interest, it was for the solicitor to resolve this for him/herself and was not the Bank's concern.

Here Nat West knew enough of the circumstances of the Company and Mr Boundy to appreciate that there was a strong possibility of Mr Boundy having a conflict of interest such that he could not possibly give Mrs B independent advice on whether to execute the charge. In those circumstances Nat West's reliance on Mr Boundy as an independent legal adviser to Mrs B could not be regarded as sufficient to dispel the real risk that Mrs B was subject to undue influence.

Accordingly Nat West were deemed to have notice of the actual undue influence and fraud upon Mrs B so the charge could not be enforced against her.

Comment

This is not a decision that need cause lenders great alarm but is a good reminder of the need to consider the principles set out in Barclays Bank Plc v O'Brien.

The principle to bear in mind is that in a situation where a chargor is receiving no obvious direct benefit from the loan and is within a category of persons assumed to be vulnerable to undue influence by the borrower then a lender must take adequate steps to ensure that the chargor is made aware of the meaning and effect of the charge. If it does so, this will mean that if undue influence had been used to get the chargor to execute the charge then the lender will not be deemed to have notice of it.

One formula for the lender to adopt is the appointment of an independent legal adviser to explain matters to the chargor. However, this formula cannot be adopted slavishly and thought needs to be given to the best way, in the light of all the circumstances known to the lender, to ensure the chargor gets the information required so that the lender cannot be deemed to be fixed with notice of any undue influence.

In the ordinary course of events a lender can rely on the solicitor advising the third party on the meaning and effect of the charge to assess and resolve for him/herself any conflict of interest, or other matters, which might interfere with their independence or ability to advise the third party.

However, if the lender knows facts and circumstances regarding the relationship of the solicitor to the borrower and the nature of the transaction for which security is to be provided, that would, or should, lead the lender to conclude that the solicitor has a conflict of interest or is otherwise not independent then the lender will not be entitled to assume that the solicitor has given adequate advice to the third party.

Please note that this information is provided for general information and therefore specific advice should be sought for individual cases.

 

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