Barclays Bank Plc. v. O'Brien [1994] 1 AC 180 HOL
Citation:Barclays Bank Plc. v. O'Brien [1994] 1 AC 180 HOL
Rule of thumb:Where one party enters a contract that is significantly against their financial interests to benefit a person they have a close relationship with, will this be presumed to be a contract obtained through undue influence? Yes, third parties who are aware of this will be on notice to advise this person to obtain legal advice before they agree the contract, or else the contract can be set aside.
Rule of thumb:If there is a widespread custom, does this become law? Yes, where the custom is widespread, it can be regarded as a legal practice. Custom is a hybrid source of law between primary and secondary sources.
Background facts:
The facts of this case were that Mr O’Brien got his wife to sign a guarantee using the family home for a loan he was taking for out for his fabrics business. Mr O’Brien, a chartered accountant, told Mrs O’Brien not to bother reading the documentation or speaking to the lawyer as he would explain it, and he ended up telling Mrs O’Brien a pack of lies about the nature of what she was signing - basically saying it was nothing. The bank made no inroads to check whether Mrs O’Brien actually understood what she was signing. Mr O'Brien's business did fail and the bank sought to repossess the house.
Parties argued:
Mrs O'Brien argued that she had been guaranteed that the business would not fail. Mrs O'Brien argued that the bank were not entitled to repossess the house as their guarantee from her was obtained with undue influence placed upon her. The bank argued that they provided all the information necessary and that the practices of Mr O'Brien were nothing to do with them.
Judgment:
The Court upheld the arguments of Mrs O'Brien and the bank were not entitled to repossess the house. The Court affirmed that where someone is entering a deal that is a very bad deal commercially for them, and they are doing this to support someone they have close emotional ties with, then this raises a presumption of undue influece, with the burden of undue influence only able to be discharged if the person has taken legal advice. In other words, the Court held that the bank should have advised Mrs O'Brien to take indepedent legal advice before signing the document so that they could remove their undue influence burden.
Where a custom is widespread in society, this should be taken into account as a secondary source of law, but it has to be ‘widespread’ before it is taken into account.
Ratio-decidendi:
'a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of 2 factors (a) ... not to the financial advantage... (b) ... substantial risk ... the husband has committed a legal or equitable wrong', Lord Browne-Wilkinson.
'Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction. It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife's agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife's rights. What, then are the reasonable steps which the creditor should take to ensure that it does not have constructive notice of the wife's rights, if any? Normally the reasonable steps necessary to avoid being fixed with constructive notice consist of making inquiry of the person who may have the earlier right (i.e. the wife) to see whether such right is asserted. It is plainly impossible to require of banks and other financial institutions that they should inquire of one spouse whether he or she has been unduly influenced or misled by the other. But in my judgment the creditor, in order to avoid being fixed with constructive notice, can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test. However for the future in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife's rights. I should make it clear that I have been considering the ordinary case where the creditor knows only that the wife is to stand surety for her husband's debts. I would not exclude exceptional cases where a creditor has knowledge of further facts which render the presence of undue influence not only possible but probable. In such cases, the creditor to be safe will have to insist that the wife is separately advised... But in my judgment the same principles are applicable to all other cases where there is an emotional relationship between cohabitees. The 'tenderness' shown by the law to married women is not based on the marriage ceremony but reflects the underlying risk of one cohabitee exploiting the emotional involvement and trust of the other. Now that unmarried cohabitation, whether heterosexual or homosexual, is widespread in our society, the law should recognise this', 198 Lord Browne-Wilkinson
‘But in my judgment the same principles are applicable to all other cases where there is an emotional relationship between cohabitees. The 'tenderness' shown by the law to married women is not based on the marriage ceremony but reflects the underlying risk of one cohabitee exploiting the emotional involvement and trust of the other. Now that unmarried cohabitation, whether heterosexual or homosexual, is widespread in our society, the law should recognise this." Lord Browne-Wilkinson
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.