Dunbar Bank Plc v Nadeem & Anor [1998] EWCA Civ 1027

EWCA-Civ
Dunbar Bank Plc v Nadeem & Anor
[1998] EWCA Civ 1027 · 1998-06-18
[1]Mrs Nadeem submits that the imposition of terms is wrong in principle and contrary to the decision of this Court in TSB v Camfield [1995] 1 WLR 430. In that case the wife was persuaded by her husband to charge her beneficial interest in the matrimonial home as security for loan facilities to her husband for his business purposes and not (as the statement of facts erroneously states) to secure the parties' joint indebtedness to the bank. The husband falsely represented to his wife that the maximum liability to be secured by the charge was £15,000. She was willing to execute the charge on that basis. The bank had constructive notice of the husband's misrepresentation and the wife was held to be entitled to have the charge set aside as against her. The bank invited the Court to substitute a charge for £15,000 on the ground this would sufficiently meet the equity of the case since the wife had been willing to execute the charge to that extent. The Court refused to do so, either by setting the charge aside in part, or by imposing terms on the relief sought. Whether that case was rightly decided or not, it was a very diferent case. There the wife obtained no benefit for himself from the transaction. As Nourse LJ said at page 434H:
"Mr Cherryman says that there can be no question of the equity being subjected to terms, such terms only being appropriate where they are necessary to procure restitutio in integrum, a doctrine which has no application here because there is nothing for the wife to give back and no cause for her to provide compensation."
In that passage Nourse LJ was summarising counsel's submissions, but it is plain from that the Court accepted them.[2]The remedy of rescission is an equitable remedy. It is well established that it is a condition of relief that the party obtaining rescission should make restitutio in integrum or, in modern terminology, counter restitution to the other party. If counter restitution cannot be made the claim to rescission fails: see Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. I reject Mr Price's submission that, had the cross-appeal not succeeded, Mrs Nadeem would have had an unqualified, unconditional right to rescission. She never had any such right. Her right to rescission was conditional on her making a counter restitution.[3]The condition which the Judge imposed was, however, wrong in principle. It is necessary to analyse the transaction which is sought to be set aside in some detail. In many cases the transaction can be analysed either as a transaction between the husband and wife, which is set aside as against the husband and through him as against the bank, or as a transaction between the wife and the bank which can be set aside directly as against the bank. In the present case it is inescapable that there must have been two agreements. By the first agreement made between Mr and Mrs Nadeem, Mr Nadeem agreed that he would purchase for Mrs Nadeem a half interest in the property on terms that she join with him in charging the property with repayment of the money advanced to make the purchase possible. In those circumstances what Mr Nadeem was offering to obtain for his wife was an interest in the equity of redemption and not in the property free from the charge. Secondly, there was the agreement between Mr and Mrs Nadeem and the Bank on terms of the facility letter. By the first agreement Mrs Nadeem obtained a half interest in the equity of redemption subject to the Bank's legal charge, and by the second she obtained jointly with her husband an advance of £260,000 on the terms that £210,000 would be used to buy the property which she and pp her husband should jointly charge in favour of the Bank to secure repayment of the advance. By the second agreement she did not obtain a freestanding loan, whether of £210,000 or £105,000, which she was free to use as she thought fit. There was no possibility of her applying the advance except for the purpose of acquiring the property so that she could join in giving security to the Bank for the money advanced with which to acquire it. Accordingly, in my judgment, the extent of Mr Nadeem's enrichment, should the Legal Charge be set aside, is not the money which was advanced to her and her husband jointly, but the interest in the equity of redemption which she obtained by the use of the Bank's money. That is the extent of her enrichment. And it is that, in my opinion, of which she must make counter restitution.[4]In my judgment, however, there was no need to impose conditions on the setting aside of the Legal Charge in order to achieve counter restitution. On the unusual facts of the present case it would have been automatic. Mrs Nadeem cannot retain her beneficial interest in the property in priority to the Bank's charge and at the same time reject liability to repay the advance by which the property was obtained. Once the Legal Charge is set aside, the source of her beneficial interest in the property must be her husband. The answer has to be her husband. He had nothing to give her except an interest in the equity of redemption subject to the Bank's security. She had no need to make counter restitution because, having set aside the Legal Charge, she cannot assert a beneficial interest in the property in priority to the Bank's legal charge to secure repayment of the money with which the property was acquired.[5]In my judgment, therefore, the Legal Charge would be to eliminate any personal liability on the part of Mrs Nadeem. Even if the Legal Charge were set aside, she would be unable to assert any beneficial interest in the property in priority to the Bank's Legal Charge. It follows that the position of the National Westminster Bank, which has a second Legal Charge on the property, is unaffected. I do not understand how it can be prejudiced in any way, nor how its second charge can prevent the setting aside of the first Legal Charge as between the Bank and Mrs Nadeem. It holds a second Legal Charge ranking behind the Bank's Legal Charge. That is a charge on the legal estate executed by both legal owners. The disappearance of Mrs Nadeem's beneficial interest or its postponement to the interest of the Bank does not advance the National Westminster's security, but neither, in my judgment, does it prejudice it. If it were the case that Mrs Nadeem were required to assign her beneficial interest in the property to her husband, the existence of such a subsequent charge on that beneficial interest might make counter-restitution impossible. But those are not the facts of this case.[6]Accordingly, I would not have been persuaded by the existence of the second legal charge in favour of the National Westminster Bank to hold that counter-restitutiion was impossible. For the reasons I have given the Bank's appeal succeeds. I would set aside the Judge's order and substitute an order dismissing the counterclaim and giving an order for possession to the Bank. LORD JUSTICE MORRITT: The case for Mrs Nadeem ("the Wife") was treated in the court below as resting on presumed undue influence of the type referred to as class 2 in the categorisation of such cases made by Lord Browne-Wilkinson in Barclays Bank Plc v O'Brien [1994] AC 180 , 189. There is no suggestion in either notice of appeal that it should be regarded as a case of express undue influence coming within class 1 of the categorisation. As a class 2 case, and it is not disputed, it is necessary for the Wife to demonstrate that the impugned transaction was to her manifest disadvantage. See National Bank Plc v Morgan [1985] AC 686 . For the reasons given by Millett LJ, I agree with him that such a case was not made out by the Wife. The consequence is that the legal charge is not liable to be set aside as against her and she has no defence to the claim for possession made by the Bank. For that reason I agree that the appeal by the Bank should be allowed. The appeal by the Wife does not therefore arise. However, the matter was fully argued and as it gives rise to problems likely to arise in other cases it may assist if I indicate what appear to me to be the appropriate principles to apply. The applicant for an order for a transaction to be set aside on the ground of undue influence or for any other invalidating tendency, as they were described by Lord Browne-wilkinson in Barclays Bank Plc v O'Brien (ibid) 190, must as a condition for relief give back all he obtained from the transaction. See Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at pp 1278-1279. The matter was put clearly by Bowen LJ in Newbigging v Adam (1886) 34 Ch D 582 at pp 592 where he said:
" .... when you come to consider what is the exact relief to which a person is entitled in a case of misrepresentation it seems to me to be this, and nothing more, that he is entitled to have the contract rescinded, and is entitled accordingly to all the incidents and consequences of such rescission. It is said that the injured party is entitled to be replaced in statu quo. It seems to me that when you are dealing with innocent misrepresentation you must understand that proposition that he is to be replaced in statu quo with this limitation - that he is not to be replaced in exactly the same position in all respects, otherwise he would be entitled to recover damages, but is to be replaced in his position so far as regards the rights and obligations which have been created by the contract into which he has been induced to enter. That seems to me to be the true doctrine, and I think it is put in the neatest way in Redgrave v Hurd ."
In the later passage to which I referred, Bowen LJ added:
"There ought, as it appears to me, to be a giving back and a taking back on both sides, including the giving back and taking back of the obligations which the contract has created, as well as the giving back and the taking back of the advantages."
Thus it is necessary to analyse the transaction to be set aside with some care, a point which was emphasised by Sir Donald Nicholls when Vice-Chancellor in Cheese v Thomas [1994] 1 AER 35, 41. In this case the Wife seeks only that the legal charge be set aside against her for that is the practical result she desires. In my view it would be to take too narrow a view to regard that as the only transaction she seeks to have set aside. In a case such as the present there were two relevant transactions. First, there was the agreement or arrangement between the Husband and the Wife that he would procure for her a half interest in the new lease to be granted by the landlord in respect of the matrimonial home if she would join with the Husband in borrowing from the Bank the sum needed for that and other purposes and charging the new lease to the bank to secure it. Second, and pursuant to the first agreement or arrangement, there was the agreement for the loan and the security made between the Husband and Wife on the one hand and the Bank on the other contained in the facility letter and the legal charge. On the footing, as found by the Judge, that the Bank had notice of the relevant undue influence, such influence had been exercised to procure both transactions, not just the legal charge, so that each of them was liable to be set aside as against both the Husband and the Bank. In these circumstances it seems to me that the right or advantage acquired by the Wife which she was bound to restore as a condition of rescission was the beneficial interest in the lease granted by the landlord and not a proportion of the debt secured by the legal charge. It was no part of the bargain made by any of the three parties involved that there should be a several loan to the Wife of any proportion of the joint loan of £260,000. Further, the Wife did not receive any part of that loan otherwise than pursuant to the obligation to apply it for the purposes set out in the facility letter. I accept the submissions for the Wife that the judge erred in imposing a condition on the order to set aside the legal charge that she should repay that part of it which might be attributable to the acquisition of her beneficial interest. So to do was to impose a condition not warranted by the obligation to make restitution and, therefore, contrary to the decision of this court in TSB Bank Plc v Camfield [1995] 1 WLR 430. It seems to me to follow from this analysis that the obligation of the Wife to make restitution as a condition for the setting aside of the legal charge is to restore to the Husband, if she can, the beneficial interest in the lease she acquired in consequence of the transactions as a whole. It is, in my view, plain that the Wife cannot retain the beneficial interest in the lease if she is to escape from liability under the facility letter and legal charge. Her obligation to restore the beneficial interest in the lease cannot be regarded as an obligation to restore it to the Bank for the Bank did not provide it and no one ever intended the Bank to be anything other than a legal chargee of it. In my view with regard to the Wife the Husband was the source of the beneficial interest in the lease now vested in his Wife subject to the legal charge. If the beneficial interest were restored to him then it would come within his charge to the Bank which is not impugned. The result would be that the Bank would then enjoy a legal charge over the whole of the beneficial interest in the lease as security for the whole of the liability. In my view this would produce a just result. The Wife's personal liability would be extinguished in exchange for the removal of her beneficial interest, being the two consequences to her of the two transactions I referred to earlier. But the further consequence would be that the Wife could have no defence to the claim of the Bank made against her for possession of the property comprised in the lease and charged to the Bank. In this case there is the additional complication of the subsequent charge granted by both Husband and Wife to the National Westminster Bank Plc. The Bank is not party to these proceedings. The Wife does not contend that that charge is also liable to be set aside against her. National Westminster Bank Plc contracted for a second charge. It would, in my view, be unjust if it should now obtain priority over Dunbar Bank in respect of the Wife's interest in the lease. In my judgment, it does not obtain such priority. One consequence of the charge on the Wife's beneficial interest being voidable, as opposed to void, is that the subsequent charge, when made, was effective in respect of her beneficial interest. In my view it follows that the Wife is not now in a position to restore to the Husband the unencumbered interest which she obtained from him. She is, therefore, unable to restore the benefit derived by her from the transactions she seeks to have set aside. The consequence is that the remedy of rescission is not now available to her. Therefore, on the facts of this case, if, contrary to the view I have already expressed, the legal charge had been procured by the undue influence of the Husband I would have concluded that it could not now be set aside. In this event also the Wife would have no defence to the claim for possession. I would allow the appeal of the Bank but dismiss the appeal of the Wife. LORD JUSTICE POTTER: I agree that the cross-appeal of the Bank should be allowed in this case on the basis that the plaintiff could not establish her plea of undue influence by demonstrating manifest disadvantage as required in National Bank v Morgan . I also agree with the analysis by Lord Justice Morritt of what, in reality, constituted the transaction to be set aside in this action for the purposes of deciding what right or advantage the Wife was bound to restore as a condition of setting aside the charge. However I prefer to express no view on the position of the National Westminster Bank or any priority it might enjoy had it been appropriate to grant the Wife the remedy sought against Dunbar Bank.

Order

Cross appeal allowed. Appeal dismissed. Order set aside. Order for possession within 56 days. Counterclaim dismissed. Leave to appeal refused. Legal aid taxation

Cited in 2 later judgments