CIBC Mortgages plc (Respondents)
v.
Pitt and another (A.P.) (Appellant)
JUDGMENT
Die Jovis 21° Octobris 1993
Upon Report from the Appellate Committee to whom was referred
the Cause CIBC Mortgages plc against Pitt and another, That the
Committee had heard Counsel as well on Monday the 24th as on
Tuesday the 25th and Wednesday the 26th days of May last upon the
Petition and Appeal of Maxine Frances Pitt of 26 Alexander
Avenue, Willesden, London NW10, praying that the matter of the
Order set forth in the Schedule thereto, namely an Order of Her
Majesty’s Court of Appeal of the 31st day of March 1993, might
be reviewed before Her Majesty the Queen in Her Court of
Parliament and that the said Order might be reversed, varied or
altered or that the Petitioner might have such other relief in
the premises as to Her Majesty the Queen in Her Court of
Parliament might seem meet; as upon the case of CIBC Mortgages
plc lodged in answer to the said Appeal; and due consideration
had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and
Temporal in the Court of Parliament of Her Majesty the Queen
assembled, That the said Order of Her Majesty’s Court of Appeal
of the 31st day of March 1993 complained of in the said Appeal
be, and the same is hereby, Affirmed and that the said Petition
and Appeal be, and the same is hereby, dismissed this House: And
it is further Ordered, That the Costs of the Respondents in this
House and in the Court of Appeal be paid out of the Legal Aid
Fund in accordance with section 18 of the Legal Aid Act 1988,
such order to be suspended for four weeks to allow the Legal Aid
Board to object if they wish; and that the costs of the Appellant
be taxed in accordance with the Legal Aid Act 1988.
Cler: Parliamentor:
Judgment: 21 October 1993
HOUSE OF LORDS
CIBC MORTGAGES PLC
(RESPONDENTS)
v.
PITT AND ANOTHER (A.P.)
(APPELLANT)
Lord Templeman
Lord Lowry
Lord Browne-Wilkinson
Lord Slynn
Lord Woolf
LORD TEMPLEMAN
My Lords,
For the reasons to be given by my noble and learned friend Lord
Browne-Wilkinson I would dismiss the appeal.
LORD LOWRY
My Lords,
I have had the advantage of reading in draft the speech prepared by my
noble and learned friend, Lord Browne-Wilkinson. I agree with it and for the
reasons he gives I too would dismiss this appeal.
LORD BROWNE-WILKINSON
My Lords,
In these proceedings the appellant defendant, Mrs. Pitt, seeks to resist
an application by the respondent plaintiff, CIBC Mortgages Plc., claiming
possession of No. 26 Alexander Avenue, Willesden, London NW10. The
plaintiff claims possession under a legal charge dated 31 July 1986 whereby
Mrs. Pitt and her husband Mr. Pitt charged the property to secure a loan of
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£150,000 made to them jointly by the plaintiff. Mrs. Pitt claims that the
plaintiff cannot enforce the legal charge because she was induced to execute
it by the misrepresentations and undue influence of her husband. The trial
judge, Mr. Recorder Davies, held against Mrs. Pitt and ordered possession of
the house to be given to the plaintiff. The Court of Appeal (Neill and Peter
Gibson L.JJ.) dismissed her appeal. Mrs. Pitt appeals to your Lordships’
House.
Mr. Pitt is 52 and Mrs. Pitt is 50. They have been married since 1964
and have two adult daughters, both of whom still live with them at 26
Alexander Avenue. That house has been the matrimonial home since 1970.
It was originally purchased in Mr. Pitt’s sole name, but in 1978, after Mrs.
Pitt raised objection, the house was put into their joint names. In 1986 the
house was valued at £270,000, the only encumbrance on it being a mortgage
in favour of a building society for £16,700.
In 1986 Mr. Pitt told Mrs. Pitt that he would like to borrow some
money on the security of the house and to use the loan to buy shares on the
stock market. He did not say what he wanted to do with the shares but he did
say that he and Mrs. Pitt would have a better standard of living. Mrs. Pitt
was not happy about this suggestion and made her feelings known to her
husband. As a result he embarked on a course of conduct putting pressure on
Mrs. Pitt which the trial judge held amounted to actual undue influence. In
consequence, Mrs. Pitt agreed to the suggestion.
Mr. Pitt was put in touch with the plaintiff and an application for a
loan was signed by both Mr. and Mrs. Pitt. The application form named both
Mr. and Mrs. Pitt as the applicants for a loan of £150,000 for a period of 20
years, the purpose of the loan being expressed to be “proposed purchase of
holiday home.” Their income was stated to be £100,000 per annum. The
transaction was said to be a remortgage, the intention being to pay off the
existing mortgage. Immediately above the space for the applicants’
signatures, the printed form contained a declaration, amongst other things, that
the information given in the application was true to the best of the applicants’
knowledge and belief. Mrs. Pitt did not read any of the pages of the
application which had been filled in by somebody else: she did see the first
and last pages.
On 6 June 1986 a written offer of mortgage was made by the plaintiff
addressed to Mr. and Mrs. Pitt. It offered a loan of £150,000 for 19 years
secured on 26 Alexander Avenue and also on a policy of assurance to be
effected by Mr. Pitt on his life. The purpose of the loan was expressed to be
“remortgage.” The offer also stated:
“It is understood that the proceeds of this advance are to be used to
purchase a second property without the applicants resorting to any
additional borrowing. Any more borrowing or change of use must be
notified to the bank immediately.”
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It was not a condition that any property purchased with the borrowed moneys
should be charged to the plaintiff. Mr. and Mrs. Pitt signed the mortgage
offer to indicate their acceptance, but Mrs. Pitt did not read it before signing.
The solicitors acting for Mr. and Mrs. Pitt on the transaction were the
plaintiff’s solicitors. On 31 July 1986 the legal charge was executed. It was
in standard form whereby Mr. and Mrs. Pitt borrowed £150,000 for 19 years
and charged 26 Alexander Avenue by way of first legal mortgage. Mrs. Pitt
signed the legal charge but did not read it. By another legal charge executed
by Mr. and Mrs. Pitt on the same day a life policy on Mr. Pitt’s life was
charged to the plaintiff: again Mrs. Pitt did not read it. At no stage did Mrs.
Pitt receive any separate advice about the transaction nor did anyone suggest
that she should do so. She did not know the amount that was being borrowed.
The plaintiff paid the advance of £150,000 to the solicitors who were
acting for all parties. They redeemed the existing mortgage to the building
society on 26 Alexander Avenue and then paid over the balance of the loan,
£133,165.04, by cheque drawn in favour of both Mr. and Mrs. Pitt. The
money was paid into their joint account.
Mr. Pitt applied the borrowed moneys to buy shares, apparently in his
own name. On 9 October 1986 Mr. Pitt charged any securities he had then
deposited or thereafter deposited in favour of the Union Bank of Switzerland.
It appears that he never liquidated any part of his holding and that he was
charging securities he had bought with the moneys borrowed from the plaintiff
in order to borrow more moneys to buy more shares. For a time, he was
highly successful with his investments in that at one stage he was a millionaire
on paper. In October 1987 the Stock Market crashed, his creditor banks sold
the securities charged to them and Mr. Pitt found himself in arrears in paying
what was due under the charge. That, in due course, led to the
commencement of these proceedings on 20 December 1990. An order for
possession was obtained against both Mr. and Mrs. Pitt but that order was set
aside as against Mrs. Pitt who alleged that the legal charge had been procured
by the undue influence and misrepresentation of Mr. Pitt and should be set
aside. At the time of the trial in July 1992, the total sum owing under the
legal charge was nearly £219,000, which apparently exceeded the value of 26
Alexander Avenue.
At the trial, Mrs. Pitt alleged, first, that she had been induced to enter
into the legal charge by Mr. Pitt falsely representing to her that the borrowed
moneys were to be used to finance the purchase of shares to be held for
capital appreciation and income, whereas his actual intention was to use the
shares so acquired as collateral for further borrowings to purchase yet more
shares. Mrs. Pitt further alleged that she entered into the charge because of
the undue influence of Mr. Pitt, that she had not understood the nature of the
obligation she was undertaking or the amount involved and that, since Mr. Pitt
had acted as the agent of the plaintiff, the charge should be set aside as against
the plaintiff. The plaintiff, in addition to denying the claims made by
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Mrs. Pitt, contended that the transaction was not manifestly disadvantageous
to Mrs. Pitt and that, following National Westminster Bank Plc. v. Morgan
[1985] A.C.686, the claim based on undue influence could not succeed. The
trial judge held (1) that Mrs. Pitt had not established any misrepresentation
made to her by Mr. Pitt; (2) that Mr. Pitt had exercised actual undue
influence on Mrs. Pitt to procure her agreement; (3) that the transaction was
manifestly disadvantageous to her and (4) that Mr. Pitt had not acted as the
agent of the plaintiff.
On those findings of fact, the judge approached the case in accordance
with the decision of the Court of Appeal in Barclays Bank Plc. v. O ‘Brien
[1993] QB 109, on the appeal from which decision your Lordships have just
delivered judgment. It will be recalled that in the O’Brien case, the Court of
Appeal detected two possible approaches which might be adopted by the court
when approaching the validity of a surety obligation undertaken by a wife to
secure her husband’s indebtedness. The first “road” required a finding that
the husband had procured the wife’s agreement by undue influence or
misrepresentation and a finding either that the husband had acted as agent for
the creditor or that the creditor had knowledge of the relevant facts. The
second, alternative, “road” involved the recognition of a special equity
whereby the security obligation entered into by the wife would be
unenforceable by the creditor if (1) the relationship of husband and wife was
known to the creditor; (2) the wife’s consent had been obtained by
misrepresentation or undue influence of the husband or the wife in some other
way lacked an adequate understanding of the nature and effect of the
transaction and (3) the creditor had failed to take reasonable steps to try to
ensure that the wife “had an adequate understanding of the nature and effect
of the transaction and that the transaction was a true and informed one.”
The trial judge, faced with a difference of view and approach in
authorities binding upon him, sensibly reached his conclusion on both the
possible “roads.” As to the first road, having found that Mrs. Pitt had been
induced to enter into the transaction by the actual undue influence of Mr. Pitt
but that Mr. Pitt was not the plaintiff’s agent, the claim failed as against the
plaintiff. As to the second road, he held that it was only applicable to cases
where a wife stands as surety for her husband’s debt and did not apply to a
case, such as the present, where there was a joint advance to both husband
and wife by way of a loan. The Court of Appeal dismissed Mrs. Pitt’s appeal
on two grounds. First, they reversed the judge’s decision on the question
whether the transaction was manifestly disadvantageous to Mrs. Pitt and held
that, since the transaction was not manifestly disadvantageous, she could not
succeed on undue influence. Second, although they felt bound by the O ‘Brien
decision, they held that the second “road” depended upon the plaintiff having
notice of the undue influence and that, since the plaintiff had neither actual
nor constructive notice of any irregularity, the charge was valid as against the
plaintiff.
– 4 –
Manifest disadvantage
In the present case, the Court of Appeal as they were bound to, applied
the law laid down in National Westminster Bank v. Morgan [1985] AC 686
as interpreted by the Court of Appeal in Bank of Credit and Commerce
International S.A. v. Aboody [1990] 1 Q.B. 923: a claim to set aside a
transaction on the grounds of undue influence whether presumed (Morgan) or
actual (Aboody) cannot succeed unless the claimant proves that the impugned
transaction was manifestly disadvantageous to him. Before your Lordships,
Mrs. Pitt submitted that the Court of Appeal in Aboody erred in extending the
need to show manifest disadvantage in cases of actual, as opposed to
presumed, undue influence. Adopting the classification used in O’Brien’s
case, it is argued that although Morgan’s case decides that the claimant must
show that the impugned transaction was disadvantageous to him in order to
raise the presumption of undue influence within Class 2(A) or (B), there is no
such requirement where it is proved affirmatively that the claimant’s
agreement to the transaction was actually obtained by undue influence within
Class 1.
In the Morgan case it was alleged that Mrs. Morgan had been induced
to grant security to the bank by the undue influence of one of the bank’s
managers. Mrs. Morgan did not allege actual undue influence within Class
1, but relied exclusively on a presumption of undue influence within Class 2.
It was held that the bank manager had never in fact assumed such a role as to
raise any presumption of undue influence. However, in addition, it was held
that Mrs. Morgan could not succeed because she had not demonstrated that the
transaction was manifestly disadvantageous to her. Lord Scarman (who
delivered the leading speech) rejected a submission that the presumption of
undue influence was based on any public policy requirements. In reliance on
the judgment of Lindley L.J. in Allcard v. Skinner (1887) 36 Ch.D. 145 and
the decision of the Privy Council in Poosathurai v. Kannappa Chettiar (1919)
L.R. 47 LA. 1, he laid down the following proposition [1985] AC 686, 704:
“Whatever the legal character of the transaction, the authorities show
that it must constitute a disadvantage sufficiently serious to require
evidence to rebut the presumption that in the circumstances of the
relationship between the parties it was procured by the exercise of
undue influence. In my judgment, therefore, the Court of Appeal
erred in law in holding that the presumption of undue influence can
arise from the evidence of the relationship of the parties without also
evidence that the transaction itself was wrongful in that it constituted
an advantage taken of the person subjected to the influence which,
failing proof to the contrary, was explicable only on the basis that
undue influence had been exercised to procure it.”
In the Aboody case [1990] 1 Q.B. 923 the claimant had established that
actual undue influence within Class 1 had been exercised to induce her to
– 5 –
enter into the impugned transaction. That transaction was not manifestly
disadvantageous to her. The Court of Appeal, following a number of dicta in
the Court of Appeal and a first instance decision subsequent to Morgan [1985]
A.C. 686, held that the decision in Morgan applied as much to cases of Class
1 actual undue influence as to Class 2 presumed undue influence. They
placed reliance on certain passages in Lord Scarman’s speech in Morgan
which indicated a view that the demonstration of a manifest disadvantage was
essential even in a Class 1 case. The Court of Appeal were initially
impressed by a submission that, if manifest disadvantage had to be shown in
all cases, an old lady who had been unduly influenced by her solicitor to sell
him her family house but had been paid the full market price for it, would be
unable to recover. However, they were satisfied that in such a case the old
lady would have a remedy under what they regarded as a wholly separate
doctrine of equity, viz., the right to set aside transactions obtained in abuse
of confidence.
My Lords, I am unable to agree with the Court of Appeal’s decision
in Aboody. I have no doubt that the decision in Morgan does not extend to
cases of actual undue influence. Despite two references in Lord Scarman’s
speech to cases of actual undue influence, as I read his speech he was
primarily concerned to establish that disadvantage had to be shown, not as a
constituent element of the cause of action for undue influence, but in order to
raise a presumption of undue influence with Class 2. That was the only
subject matter before the House of Lords in Morgan and the passage I have
already cited was directed solely to that point. With the exception of a
passing reference to Ormes v. Beadel (1860) 2 Gif. 166, all the cases referred
to by Lord Scarman were cases of presumed undue influence. In the
circumstances, I do not think that this House can have been intending to lay
down any general principle applicable to all claims of undue influence,
whether actual or presumed.
Whatever the merits of requiring a complainant to show manifest
disadvantage in order to raise a Class 2 presumption of undue influence, in
my judgment there is no logic in imposing such a requirement where actual
undue influence has been exercised and proved. Actual undue influence is a
species of fraud. Like any other victim of fraud, a person who has been
induced by undue influence to carry out a transaction which he did not freely
and knowingly enter into is entitled to have that transaction set aside as of
right. No case decided before Morgan was cited (nor am I aware of any) in
which a transaction proved to have been obtained by actual undue influence
has been upheld nor is there any case in which a court has even considered
whether the transaction was, or was not, advantageous. A man guilty of fraud
is no more entitled to argue that the transaction was beneficial to the person
defrauded than is a man who has procured a transaction by misrepresentation.
The effect of the wrongdoer’s conduct is to prevent the wronged party from
bringing a free will and properly informed mind to bear on the proposed
transaction which accordingly must be set aside in equity as a matter of
justice.
– 6 –
I therefore hold that a claimant who proves actual undue influence is
not under the further burden of proving that the transaction induced by undue
influence was manifestly disadvantageous: he is entitled as of right to have
it set aside.
I should add that the exact limits of the decision in Morgan may have
to be considered in the future. The difficulty is to establish the relationship
between the law as laid down in Morgan and the long standing principle laid
down in the abuse of confidence cases viz. the law requires those in a
fiduciary position who enter into transactions with those to whom they owe
fiduciary duties to establish affirmatively that the transaction was a fair one:
see for example Demarara Bauxite Co. Ltd. v. Hubbard [1923] AC 673;
Moodie v. Cox and Hatt [1917] 2 Ch. 71 and the discussion in the Aboody
case, at pp. 962G-964C. The abuse of confidence principle is founded on
considerations of general public policy viz. that in order to protect those to
whom fiduciaries owe duties as a class from exploitation by fiduciaries as a
class, the law imposes a heavy duty on fiduciaries to show the righteousness
of the transactions they enter into with those to whom they owe such duties.
This principle is in sharp contrast with the view of this House in Morgan that
in cases of presumed undue influence (a) the law is not based on
considerations of public policy and (b) that it is for the claimant to prove that
the transaction was disadvantageous rather than for the fiduciary to prove that
it was not disadvantageous. Unfortunately, the attention of this House in
Morgan was not drawn to the abuse of confidence cases and therefore the
interaction between the two principles (if indeed they are two separate
principles) remains obscure: see also 48 M.L.R. 579; Wright v. Carter
[1903] 1 Ch. 27.
Notice
Even though, in my view, Mrs. Pitt is entitled to set aside the
transaction as against Mr. Pitt, she has to establish that in some way the
plaintiff is affected by the wrongdoing of Mr. Pitt so as to be entitled to set
aside the legal charge as against the plaintiff.
The Court of Appeal in the present case treated themselves as bound
by the Court of Appeal decision in O’Brien. They were unwilling to
distinguish O ‘Brien on the ground that the instant case is one of a loan to the
husband and wife jointly whereas O’Brien was a surety case. However, pre-
echoing our decision in O’Brien, they distinguished it on the grounds of
notice. Peter Gibson L.J. said:
“We are concerned with the application of equitable principles. I start
with the fact that equity does not presume undue influence in
transactions between husband and wife. Further, bona fide purchasers
for value without notice are recognised in equity as having a good
defence to equitable claims. On principle therefore a creditor who is
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not on notice of any actual or likely undue influence in a transaction
involving a husband and wife ought not to be affected by the exercise
of undue influence by the husband. Of course if the creditor leaves it
to the husband to procure the wife’s participation in the transaction or
otherwise makes the husband the creditor’s agent, whether in a strict
or some looser sense, then the creditor is affected by the acts of the
agent and notice of undue influence by the husband can be imputed to
the creditor. By reason of the O’Brien case, I must accept that in a
case where a wife provides security for a husband’s debts, the creditor,
unless it takes steps to ensure that the wife understands the transaction
and that her consent was true and informed, may be affected by any
undue influence exerted by the husband to procure the wife’s actions,
even if the creditor has no knowledge of the undue influence; but that
is explicable on the basis that such a transaction, favouring a husband
at the expense of his wife, on its face puts the creditor on notice of the
possibility of undue influence by the husband. By parity of reasoning,
if there is a secured loan to a husband and wife but the creditor is
aware that the purposes of the loan are to pay the husband’s debts or
otherwise for his (as distinct from their joint) purposes, the creditor,
without taking precautionary steps, may be affected by the husband’s
misconduct.
“On that footing, on the facts of the present case it is in my judgment
clear that the plaintiff had no actual knowledge of the acts of Mr. Pitt
relied on by Mrs. Pitt as constituting undue influence. Nor was there
anything to put the plaintiff on notice that this was other than a routine
transaction for the benefit of both Mr. and Mrs. Pitt. It was, so far
as the plaintiff was aware, partly a remortgaging transaction, and
partly the raising of money to purchase other property for the joint
benefit of Mr. and Mrs. Pitt and the cheque was made payable to them
jointly. True it is that there was a greatly increased borrowing on
their house, but the valuation showed that there would be a substantial
equity in the house after the borrowing. In my judgment therefore the
innocent plaintiff is not affected by the undue influence exercised by
Mr. Pitt over Mrs. Pitt and accordingly on this ground Mrs. Pitt’s
defence to these proceedings fails.”
I agree with this conclusion and, save to the extent that it recognises
as good law the reasoning of the Court of Appeal in O’Brien, with the
analysis of Peter Gibson L.J. Applying the decision of this House in O ‘Brien,
Mrs. Pitt has established actual undue influence by Mr. Pitt. The plaintiff
will not however be affected by such undue influence unless Mr. Pitt was, in
a real sense, acting as agent of the plaintiff in procuring Mrs. Pitt’s agreement
or the plaintiff had actual or constructive notice of the undue influence. The
judge has correctly held that Mr. Pitt was not acting as agent for the plaintiff.
The plaintiff had no actual notice of the undue influence. What, then, was
known to the plaintiff that could put it on inquiry so as to fix it with
constructive notice?
– 8 –
So far as the plaintiff was aware, the transaction consisted of a joint
loan to husband and wife to finance the discharge of an existing mortgage on
26 Alexander Avenue, and as to the balance to be applied in buying a holiday
home. The loan was advanced to both husband and wife jointly. There was
nothing to indicate to the plaintiff that this was anything other than a normal
advance to husband and wife for their joint benefit.
Mr. Price, for Mrs. Pitt, argued that the invalidating tendency which
reflects the risk of there being Class 2(B) undue influence was, in itself,
sufficient to put the plaintiff on inquiry. I reject this submission without
hesitation. It accords neither with justice nor with practical common sense.
If third parties were to be fixed with constructive notice of undue influence in
relation to every transaction between husband and wife, such transactions
would become almost impossible. On every purchase of a home in the joint
names, the building society or bank financing the purchase would have to
insist on meeting the wife separately from her husband, advise her as to the
nature of the transaction and recommend her to take legal advice separate
from that of her husband. If that were not done, the financial institution
would have to run the risk of a subsequent attempt by the wife to avoid her
liabilities under the mortgage on the grounds of undue influence or
misrepresentation. To establish the law in that sense would not benefit the
average married couple and would discourage financial institutions from
making the advance.
What distinguishes the case of the joint advance from the surety case
is that, in the latter, there is not only the possibility of undue influence having
been exercised but also the increased risk of it having in fact been exercised
because, at least on its face, the guarantee by a wife of her husband’s debts
is not for her financial benefit. It is the combination of these two factors that
puts the creditor on inquiry.
For these reasons I agree with the Court of Appeal on this issue and
would dismiss the appeal. Mrs. Pitt is legally aided but, subject to affording
the Legal Aid Board an opportunity to be heard, I would order her costs of
this appeal to be paid out of the Legal Aid Fund.
LORD SLYNN OF HADLEY
My Lords
I, too would dismiss this appeal for the reasons given in the speech of my
noble and learned friend Lord Brown-Wilkinson.
– 9 –
LORD WOOLF
My Lords,
I have had the advantage of reading in draft the speech prepared by my
noble and learned friend, Lord Browne-Wilkinson. I agree with it and for the
reasons he gives I too would dismiss this appeal.
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