IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE BIRMINGHAM COUNTY COURT
(HER HONOUR JUDGE HINDLEY QC)
Royal Courts of Justice
The Strand, London
Wednesday 9 December 1998
B e f o r e:
B E T W E E N:
Appellant/Plaintiff
- v -
Respondents/Defendants
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MR M COTTLE (instructed by Messrs Restons, Cheshire
W1A 1NF) appeared on behalf of the appellant
MR P DIAMOND (instructed by Messrs Elliott & Co, Birmingham B3 1LP) appeared
on behalf of the respondent
_______________
This is an appeal by the National Westminster Bank Plc ("the bank") from an order of Her Honour Judge Hindley QC sitting in the Birmingham County Court. Leave to appeal against her order was granted by Sir Anthony McCowan.
On 24 March 1998 Her Honour Judge Hindley dismissed an appeal against an order made by Deputy District Judge Sanghera on 14 January 1998. The Deputy District Judge had dismissed an application by the bank to strike out a defence and counterclaim as disclosing no reasonable defence or cause of action, or as scandalous, frivolous, vexatious or otherwise an abuse of the process of the court.
The action is one in which the bank, as mortgagee, claims possession of a dwelling-house at 82 Radnor Close, Frankley, Birmingham, which is owned by the defendant, Mrs Rashida Amin. She is also sued in her capacity as executrix of her late husband, Mr Mohammed Amin.
The factual background to the application to strike out in this appeal is as follows. In 1972 Mr and Mrs Amin arrived in the United Kingdom from Uganda. In 1980 they bought 82 Radnor Close. In 1988 their youngest son, Mr Irfan Choudry, who is qualified as a civil engineer, wished to borrow £30,000 from the bank in connection with his business, specifically for the purchase of machinery in that business which was carried on under the name of 'Usman Belts'. Naturally, the bank required security for the loan of such a sum. The son provided security in the form of an assignment of his interest in a life policy. The bank required further security which was provided by Mr and Mrs Amin executing a second legal mortgage over their house, dated 2 September 1988.
In connection with the mortgage the bank had written a letter on 26 August 1988 to a firm of solicitors in Birmingham, Messrs Christopher Miles. The relevant parts of the letter read as follows:
Dear Sirs
Mohammed & Rashida Amin,
82 Radnor Close, RuberyWe have agreed to assist our customer, Mr I Choudry with loan facilities, subject to our being given a second legal mortgage by Mr & Mrs Amin over the above mentioned property.
In this connection, we enclose the necessary mortgage document, and shall be grateful if you will attend to the following formalities on our behalf.
1. Please ensure Mr & Mrs Amin are fully aware of the terms and conditions of the mortgage document, answering any questions they may raise .....
There are further requests made by the bank to the solicitors in relation to the details of the completion of the mortgage.
Paragraph 8 of the letter states:
Your costs in this connection are to be paid by Mr & Mrs Amin.
Once executed, please return the mortgage document to ourselves so that we may arrange for the registration.
The letter concluded:
May we take this opportunity of thanking you in anticipation of your assistance in this matter and look forward to receiving your reply in due course.
The reply from Christopher Miles is dated 2 September 1988, and is addressed to the bank's branch at Hall Green, Birmingham. It has the same heading as the letter to the solicitors. It states:
I refer to your letter dated 26 August and enclose executed legal mortgage. I confirm that I have explained the terms and conditions to Mr & Mrs Amin. Yours faithfully, (signed) Christopher Miles.
Unfortunately, the son defaulted on the mortgage and the bank required repayment of the loan.
Sadly, on 17 April 1996 Mr Mohammed Amin died, leaving his widow living in the house.
On 26 June 1997 the bank began proceedings for possession of the house. Mrs Amin served a defence and counterclaim on 5 September 1997. She denied any liability to the bank. She denied that any of the monies under the legal mortgage were owed by her to the bank.
There is a plea of undue influence alleged to have been exerted by their son over her and her late husband. It is pleaded that they reposed trust and confidence in their son; that undue influence had been exerted in the respects itemised in the particulars; and that the bank had constructive notice of the undue influence and were put on inquiry as to the rights of Mr and Mrs Amin. The particular matters relied on include the fact that Mr and Mrs Amin are Muslims who were forced to leave Uganda in 1972, pursuant to the policies of President Amin; that they do not speak, read or write English; that they have been, and are, dependent on their children, including their son who had been educated in the United Kingdom, who was fully anglicised, and who was a businessman who speaks and writes English.
There is a specific allegation on which particular attention has been focused by counsel for Mrs Amin. It is alleged:
The Plaintiff bank is situate in a district of the City of Birmingham in which there are significant numbers of citizens of Asian background. It is not uncommon that the parents do not understand English, whilst their children do and are culturally assimilated.
The known circumstances of clientele can place a creditor institution on a higher duty of care.
The Legal Mortgage was to secure the debts of the Debtor ([the son] who was an unsecured Debtor) and the [bank] was under an obligation to communicate directly with the Defendants on this matter and not to leave the obtaining of the Guarantee to the Debtor.
It is alleged in paragraph 7 that the bank failed to advise Mr and Mrs Amin in the absence of each of them and their son of the amount of her and his potential liability and of the risks involved. In addition, it is alleged that the bank failed to advise Mr and Mrs Amin to take independent advice. The matters relied on in defence also form the basis of the counterclaim in which it is claimed that the legal mortgage is unenforceable, as induced by undue influence, and that the bank has constructive notice of that undue influence and were placed on inquiry as to the rights of Mr and Mrs Amin. The relief claimed in the counterclaim is for a declaration that the mortgage be set side and be null and void against the defendants, and for rescission of the legal mortgage as being null and void.
There is clearly raised in the defence and the counterclaim an "O'Brien case" based on the decision of the House of Lords in Barclays Bank Plc v. O'Brien [1994] 1 AC 10. The response of the bank was to take out an application on 17 October 1997 for an order that Mrs Amin's defence and counterclaim be struck out on the grounds that they disclosed no reasonable cause of defence and/or action, or that they were scandalous, frivolous or vexatious or otherwise an abuse of the process of the court.
Affidavit evidence was served on behalf of the bank, including an affidavit by Mr Michael Eyre, who, in 1988, was an assistant solicitor with Messrs Christopher Miles, Birmingham. In relation to the legal mortgage of 2 September 1988 he states:
In such circumstances, my standard practice was to explain the legal effect of the legal mortgage, which was a third party charge securing the liabilities of Mr Irfan Choudry and having been requested by the plaintiff I would have specifically pointed out to the defendants the terms of the first page of the legal mortgage and the implications thereon. Only when that had been discussed would I have asked the defendants to sign the legal mortgage deed and I am therefore convinced that they understood the potential liability which they had assumed.
He referred to his letter of 2 September 1988 already quoted.
Mr Cottle, on behalf of the bank, accepts that that affidavit evidence was not admissible on the ground of striking out as disclosing no reasonable defence or cause of action, but says, and I accept, that such evidence is admissible on the other ground relied on in the notice of application. No evidence has been filed on this application by or on behalf of Mrs Amin, though we have been informed by Mr Diamond, who represents her, that there are already prepared witness statements, and an expert's report from a bank manager of a relevant bank dealing with the point on the alleged higher duty on a lender to citizens of Asian background who do not speak or understand English, but have children educated here who do. The appeal from the order of the Deputy Circuit Judge was heard by her Honour Judge Hindley on 24 March. She held that, although Mrs Amin's defence and counterclaim were on the face of it weak, it was not
so manifestly and obviously unsustainable that it should be struck out under Order 13, rule 5 [of the County Court Rules].
She commented on the difficulty arising from the failure of Mrs Amin's advisers to file any evidence in support of the contention that this was an exceptional case where a lender owed a higher duty of care and had constructive notice of undue influence by reason of the cultural background and other circumstances of Mr and Mrs Amin. She made directions for the filing of statements of witnesses of fact and of experts by a specified date. She also made orders for discovery and exchange of the experts' reports.
The bank appeal against that refusal to strike out. On behalf of the bank, Mr Cottle has relied for his main point on the ruling handed down by the Court of Appeal in Royal Bank of Scotland v. Etridge (No 2) [1998] 4 All ER 705, a case decided since the judge gave judgment in this case. Mr Cottle's overall submission was that, in the light of the decision in Etridge, there was no fair and reasonable probability of Mrs Amin establishing a bona fide defence. This is therefore a proper case for summarily preventing the proceedings from continuing to trial. He said that both the defence and the counterclaim are doomed to failure in the light of the Court of Appeal's decision in Etridge.
In a nutshell his case was that, so far as the bank were concerned, Mr and Mrs Amin had had the benefit of independent legal advice prior to the execution of the legal charge on 2 September 1988. A firm of solicitors, Christopher Miles, had been asked by the bank to ensure that Mr and Mrs Amin were fully aware of the terms and conditions of the legal mortgage. The matters requested by the bank had been expressly confirmed by those solicitors when they wrote on 2 September saying that they had explained the terms and conditions to Mr and Mrs Amin. In those circumstances Mr Cottle submitted that the bank was entitled to rely on the solicitor's certificate, notwithstanding the difficulty of any cultural and linguistic conditions specifically affecting Mr and Mrs Amin's position. In conclusion, the bank had no constructive notice of any rights in Mr and Mrs Amin; the bank had taken reasonable steps to ensure that Mr and Mrs Amin's agreement to the legal mortgage had been properly obtained.
In support of those submissions, Mr Cottle referred to following passages in Etridge:
41. It is now settled law that the question whether the bank can exercise its legal rights against the wife depends in the first instance on whether the wife has an equity to set aside the transaction and in the second on whether, at the time when it gave value, the bank had notice, actual imputed or constructive, of the wife's equity. In relation to the first question, the issue is whether the advice actually given was sufficient to rebut the presumption of undue influence. In relation to the second, the issue is different: it is whether, in the light of the facts known to the bank, including the availability of legal advice, any risk of the wife having an equity reasonably appeared to have been dispelled. The first question depends on what actually happened between the wife, her husband, and the solicitor. The second question depends on how the transaction appeared to the bank.
42. Although these issues raise questions of fact, the structure of the underlying transaction is so commonplace and the efficient funding of small businesses is so dependent on its validity, that the parties, and in particular the lending institutions, must be entitled to proceed in accordance with a settled practice which is effective to secure the validity of the transaction while at the same time affording the wife the protection of proper legal advice. It is highly undesirable that the validity of such transactions should depend on fine distinctions, particularly on distinctions in the wording of the instructions to the solicitors or the certificates they give.
....
44. These cases establish the following propositions.
(1) Where the wife deals with the bank through a solicitor, whether acting for her alone or for her and her husband, the bank is not ordinarily put on inquiry. The bank is entitled to assume that the solicitor has considered whether there is a sufficient conflict of interest to make it necessary for him to advise her to obtain independent legal advice. It is not necessary for the bank to ask the solicitor to carry out his professional obligation to give proper advice to the wife or to confirm that he has done so. The bank is ordinarily not required to take any steps at all: see Rayerel's case.
(2) Where the wife does not approach the bank through a solicitor, it is normally sufficient if the bank has urged her to obtain independent legal advice before entering into the transaction: see Massey's case and Rayerel's case. This is especially the case if the solicitor provides confirmation that he has explained the transaction to the wife and that she appears to understand it: see Rayerel's case.
(3) When giving advice to the wife the solicitor is acting exclusively as her solicitor: see Serter's case and Thomson's case. It makes no difference whether he is unconnected with the husband or the wife (see Thomson's case) or is also the husband's solicitor (See Serter's case, Massey's case and Mann's case) or that he has agreed to act in a ministerial capacity as the bank's agent at completion (see Serter's case and Stepsky's case). Whoever introduces the solicitor to the wife and asks him to advise her, and whoever is responsible for his fees, the bank is entitled to expect the solicitor to regard himself as owing a duty to the wife alone when giving her advice (see Thomson's case). If the solicitor accepts the bank's instructions to advise the wife, he still acts as her solicitor and not the bank's solicitor when he interviews her (see Thomson's case).
(4) It follows that the bank is not fixed with imputed notice of what the solicitor learns in the course of advising the wife even if he is also the bank's solicitor. Such knowledge does not come to him in his capacity as the bank's solicitor: see Stepsky's case.
(5) The bank is entitled to rely on the fact that the solicitor undertook the task of explaining the transaction to the wife as showing that he considered himself to be sufficiently independent for this purpose: see Mann's case and Rayerel's case. The bank is not required to question the solicitor's independence, even if it knows that he is also the husband's solicitor: see Massey's case and Rayerel's case.
(6) The bank is not concerned to question the sufficiency of the advice, and is not put on further inquiry by the fact that the solicitor was asked only to explain the transaction to the wife and ensure that she understood it and not to see that she was sufficiently independent of her husband. Nor is the bank put on inquiry by the fact that the confirmation provided by the solicitor is similarly limited (passim).
....
47. It follows from the need to avoid subtle distinctions that we attach no importance to the fact that the solicitor may not provide the bank with a full or adequate confirmation that he has followed his instructions. Where the bank has asked him to explain the transaction to the wife and confirm that she appeared to understand it, the bank is not in our opinion put on inquiry by the fact that the solicitor has confirmed that he has explained the transaction to her but not that she appeared to understand it. In any case we do not consider that such confirmation is an essential requirement. Where the bank has asked a solicitor to explain the transaction to the wife and he fails to confirm that he has done so, the bank is not entitled to assume that he has: see Cooke v. National Westminster Bank plc (1998) Times, 27 July [1998] CA Transcript 928. But at most this should put the bank on inquiry whether the solicitor has in fact advised the wife. If it fails to make further inquiry, then it takes the risk that he has not done so; but if he has and merely omitted to confirm the fact, then we think that the bank should not be affected by its failure to obtain confirmation before completing the transaction.
....
49. While the bank is normally entitled to assume that a solicitor who is asked to advise the wife will discharge his duties fully and competently, and that he will not have restricted himself to giving an explanation of the transaction and satisfying himself that she appears to understand it, it cannot make any such assumption if it knows or ought to know that it is false: Burch's case. If the bank is in possession of material information which is not available to the solicitor, or if the transaction is one into which no competent solicitor could properly advise the wife to enter, the availability of legal advice is insufficient to avoid the bank being fixed with constructive notice.
50. Ultimately the issue is whether, at the time when value is given, and in the light of all the information in the bank's possession, including its knowledge of the state of the account, the relationship of the parties, and the availability of legal advice for the wife, there is still a risk that the wife has entered into the transaction as a result of her husband's misrepresentation or undue influence.
Those passages contain a comprehensive review of all the earlier authorities of the Court of Appeal and other courts following the House of Lords' decision in O'Brien. They were clearly intended by that court to provide as clear guidance as could be given to later courts on how to deal with O'Brien cases where the issue arising is whether the lender has constructive notice of the undue influence claimed to have been exerted either as between husband and wife, as were the facts in Etridge and related cases, or in other relationships, for example, a child and parent, such as this case. One of the authorities relied on by Mr Diamond in this case concerned a child and parents. It was cited in Etridge: see Avon Finance Co Ltd v. Bridger [1985] 2 All ER 281.
Mr Cottle concluded that, applying the principles set out in Etridge to the facts of this case, the bank was not affected by constructive notice of any undue influence that may have been exerted over Mr and Mrs Amin by their son. This was a case where the bank had expressly asked a firm of solicitors to explain the transaction to the guarantors. The solicitors had expressly confirmed to the bank that they had done this. In those circumstances the bank were entitled to assume that the solicitors had done what they said they had done. That was the end of the matter.
Mr Diamond, who appears on behalf of Mrs Amin, said that this was not an appropriate case for a striking-out order. He made a number of points for allowing this case to proceed to trial. He said that the matter should go to trial in order to establish the facts in what he described as a "novel case". Two of the novel features of it were, first, the fact that Mr and Mrs Amin were members of the Ugandan/Asian community in the area served by the bank and were without the benefit of the education that their son had had here. They could not read or write English. He contended that the bank dealing with such people in the community, and making money out of dealings with them, owed a higher duty of care, a duty to take reasonable steps to see that there had not been undue influence exercised by an anglicised, educated son over them. The question whether the bank had taken reasonable steps (which was at the core of the doctrine of notice) was a factual matter which could only be fully investigated by having a trial. It is not appropriate to decide that issue in the summary procedure of striking out.
The second special feature of this case which he highlighted was the fact that there had been no meeting between anyone from the bank with Mr and Mrs Amin. They had received no letters or any correspondence from the bank. They had absolutely no contact with the bank in any capacity. As for the solicitors who had been in correspondence with the bank, and who had arranged for the execution of the legal charge, they were the solicitors acting for Mr and Mrs Amin's son.
Building on these two special features, Mr Diamond skilfully related the authorities on this subject prior to the Etridge case to these facts. He relied on Barclays Bank Plc v. O'Brien [1994] 1 AC 180 and the passage of the speech of Lord Browne-Wilkinson at pages 196D -197B. On the specific question of lack of communication between the bank and the surety he referred to what he described as the "elderly parents" case of Avon Finance v. Bridger (supra). He referred to the passage in the judgment of Lord Denning MR at page 284D-E, which describes the circumstances in which a son had deceived his parents into believing that the documents which they signed were other than they really were, that is documents of mortgage. He also referred to Banco Exterior Internacional v. Mann [1995] 1 All ER 936, and to the dissenting judgment of Hobhouse LJ at page 947J - 948F (a passage which, however, should be contrasted with the judgment of Sir Thomas Bingham MR at page 950A-D, which is one of the judgments in the majority). Finally, he referred to Credit Lyonnais Bank Nederland NV v. Burch [1997] 1 All ER 144. He cited passages from the judgment of Millett LJ at pages 155G - 156J.
Relying on these passages, Mr Diamond emphasised his point that the overall test relevant to constructive notice of a lender was its reasonableness of its conduct in all the circumstances. Further, he said that the circumstances relevant to that argument could not be finally determined unless and until there had been a trial. His argument may be summarised thus. The issues are: (1) the thrust of the equity is whether the lender has discharged his responsibilities, not whether independent legal advice has been taken per se; (2) the creditor is under a duty to take positive steps and the extent of those steps; the surety must be satisfied about the adequacy of any legal advice; and (3) the question is the definition of "reasonable steps". What is reasonable in this case is conditioned by the fact that Mr and Mrs Amin were members of a specially vulnerable group to whom equity should extend its protection. On that theme he referred to the concluding paragraph of the advice of the Privy Council in the case of Grahame v. Attorney General of Fiji [1936] 2 All ER 992.
Mr Diamond emphasised the exceptional features of the case, which I have identified. He said that it was not appropriate for this court to take a course which would have the effect of denying to Mrs Amin any remedy. It is too late for her to assert a remedy against the solicitors. A remedy by her against her son is presumably as worthless as a remedy by the bank against her son. So all that she would be left with is a remedy against the bank. She should, he contended, be allowed to proceed against the bank with her counterclaim and her defence.
Finally, he sought to reinforce that part of his argument by reference to Article 8 and Article 13 of the European Convention on Human Rights. He cited a passage from Derbyshire County Council v. Times Newspapers Ltd [1990] 1 QB 770, a judgment of Balcombe LJ in the Court of Appeal which refers to the use of Articles of the European Convention on Human Rights in relation to common law and equitable doctrines where they are uncertain. It goes without saying that this case is of the greatest importance to Mrs Amin. Possession is sought of the home which she occupies now as a widow and sole owner. The case requires careful consideration. I am however satisfied, by the arguments of Mr Cottle, that this appeal should be allowed. It is now clear, if it was not clear before, from the most recent decision of the Court of Appeal that in an O'Brien type of case, where a lender is seeking to enforce his rights over the security, the question whether or not the lender has constructive notice of such matters as the exercise of undue influence depends on how the transaction appeared to the lender at the time when it was entered into. In the Etridge case the Court of Appeal stated expressly in paragraph 42 of their decision that, although that raises an issue of fact:
The structure of the underlying transaction is so commonplace and the efficient funding of small businesses is so dependent on its validity, that the parties, and in particular the lending institutions, must be entitled to proceed in accordance with a settled practice which is effective to secure the validity of the transaction while at the same time affording the wife the protection of proper legal advice.
That paragraph concludes with this important statement:
It is highly undesirable that the validity of such transactions should depend on fine distinctions, particularly on distinctions in the wording of instructions to the solicitors or the certificates they give.
In this case the certificate which was given by the solicitors, Christopher Miles, could not have been clearer. It conformed to the request made by the bank. It expressly confirmed that the terms and conditions of the legal mortgage had been explained to Mr and Mrs Amin. Of course, the bank could have inquired further into the particular circumstances of Mr and Mrs Amin, their ability to speak, write and understand English, their relationship with their son, their knowledge of their son's business activities and so on, but for the reasons expressly stated by the Court of Appeal in the passage already quoted, I am of the view that the bank was not obliged when it received such a letter as is dated 2 September 1988 to conduct further inquiries in order to avoid being fixed with constructive notice as of such matters as undue influence allegedly exercised by one member of a family over another or other members of a family. I have reached the conclusion that the judge ought to have struck out the defence and counterclaim. In the light of recent authority it has no reasonable prospect of success. I do not consider that the arguments which have been raised by Mr Diamond with considerable skill have revealed a reasonable prospect of success. I would allow the appeal and make an order striking out the defence and counterclaim.
I agree.
ORDER: Appeal allowed with costs here and below to be added to the security in accordance with the provisions of the legal charge of 2 September 1988; the defence and counterclaim to be struck out; possession of the property to take place within three months; legal aid taxation of the respondent's costs; leave to appeal refused.