The Gazette 1994

GAZETTE

JUNE 1994

O'Brien. The Law Lords could see no reason why a limited class of persons in a limited class of transactions should be given a special remedy. Further it feared that such a rule would reintroduce the presumption that a husband unduly influences his wife. The House of Lords was satisfied that justice only requires the bank to be barred from recovering where it has notice of the undue influence. The test of notice however is stringent: it is for the bank to take steps to ensure that the wife acted freely. While there is no presumption, there is often a real possibility that the wife will succumb

husband's debt, it is under a duty to ensure that she obtains independent legal advice and, if it does not, it will be deemed that the wife did not act freely. Geoghegan J unfortunately seems to have missed a crucial difference between Smyth and O'Brien. The House of Lords in O 'Brien emphasised that there are two parties to any transaction, both of whom have rights. If there is no undue influence or misrepresentation by the husband, the bank will not be penalised even it failed to act prudently. If there is wrongdoing by the husband, the bank will still not be denied a remedy if it warned the wife of the risks involved and recommended independent legal advice. This is the vital difference between Smyth and O'Brien. In O'Brien the wife proved that her husband had procured her agreement by misrepresentation: the bank lost its claim because it had notice of this. In Smyth however there was no evidence of misrepresentation or undue influence by the husband or anyone else. The wife claimed that because she was a person who might be a victim of undue influence or misrepresentation, the bank's failure to recommend independent legal advice in itself meant that she did not give her consent freely. With respect, this is neither Irish nor English law. Geoghegan J said vaguely that the principle is found in Irish cases on voluntary deeds. But a deed will not be set aside merely because it is voluntary: the alleged victim must show a recognised wrong, such as unconscionable bargain or undue influence. For unconscionable bargain, it must be shown that one party was actually vulnerable or in need of special protection: Mrs Smyth merely said that she was a person who might be vulnerable. Undue influence must be proved or presumed: none was proved, nor did the Judge find it could be presumed. If Mrs. Smyth did not succumb to pressure, how can it be found that she did not act freely? O 'Brien is surely to be preferred to Hogan which relieves the bank of any duty at all, or to Smyth which places

on the bank so heavy a duty that it will be penalised even if the wife was not victimised.

Nature and Extent of the Bank's Duty

It is very difficult for an Irish bank to know where it owes a duty to a wife who acts as surety. Assuming that the duty does exist, what is its nature and extent? Here, Irish and English law more or less agree. The bank has a general duty to ensure that the wife understands the nature of the transaction and a specific duty to recommend that she takes independent legal advice. The nature and extent of the duty will vary according to the circumstances: in a case involving a charge on the family home, it is essential that the wife understands the risk of losing it. In Smyth the Judge evidently approved four criteria which had been set out by counsel for Mrs. Smyth:- 1) the wife must be told the amount of the loan and whether the security is to cover future advances; payment must be explained and in particular that possession of the family home may be recovered by the bank, which may sell it. Later Geoghegan J suggested that a bank could either explain the document itself or recommend independent legal advice; but in O'Brien the Law Lords thought it must do both. Further, the explanation should be given in the absence of the husband. What is independent legal advice? Here Hogan may cause difficulty. It must be borne in mind that Keane J disbelieved the wife's evidence. Nonetheless his finding that the wife had received independent legal advice is a little odd, since the firm of solicitors who advised her was also the 2) she must have the repayment terms explained to her; 3) she must be recommended to take independent legal advice; 4) the consequences of the non-

to pressure. Where a wife gives security, it is generally true:-

1) that she is acting to her own disadvantage;

2) that there is a risk that the husband will have put pressure on her.

Therefore in such cases the bank will always be under a duty to satisfy itself as to the truth. This seems a fair and reasonable rule: but it is not clear how far it will be adopted in Ireland. In Hogan, in so far as the matter was considered at all, Keane J merely stated that he did not think there was any duty on the bank to ensure that the wife acted freely. His reason was that the House of Lords in Morgan had found that in a normal banking transaction there is no duty on the bank to recommend independent legal advice. It is clear from Pitt and O 'Brien however that this is no longer the law in the UK: the fact the wife stands surety for her husband's debt must alert the bank to the possibility of undue influence. In Smyth the issue was whether the wife's consent to the mortgage of her family home was invalid on the ground that she had not been advised to obtain independent legal advice. Geoghegan J found that her consent was invalid, simply because she had not been so advised. He agreed with the Court of Appeal in O'Brien that wives are a specially protected class: therefore, whenever a bank is aware that a wife is standing surety for her

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