CIBC Mortgages plc v Pitt [1993] UKHL 7

House of Lords
Between
CIBC Mortgages plcAppellantPittRespondent
Before
Lord TemplemanDate 21 October 1993
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.

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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 ChD 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

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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.

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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?

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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.

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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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