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Royal Bank of Scotland v Etridge  [1998] 4 All ER 705 House of Lords

The case concerned a number of conjoined appeals concerning banks seeking possession of homes where a wife had signed a charge or mortgage agreeing to secure the debts of the husband on the family home. The House of Lords reviewed the current authorities and restated some of the principles. The main changes:

1. Manifest disadvantage

This term should no longer be used as it is ambiguous and leads to many misunderstandings and is often misapplied. Instead the transaction must be one which can not readily be explained on ground of friendship, relationship or charity.

2. Constructive notice

A bank will be put on enquiry whenever a wife offers to stand surety for her husband's debts.

There is no need to show that the bank was aware of the relationship capable of giving rise to a presumption of influence.

There is no absolute obligation on a bank to have a private meeting with the wife provided they take other steps to satisfy themselves that the wife has been appropriately advised. This may be achieved through confirmation from a solicitor that she has been advised.

The steps a solicitor should take as a core minimum:

(1) He will need to explain the nature of the documents and the practical consequences these will have for the wife if she signs them. She could lose her home if her husband's business does not prosper. Her home may be her only substantial asset, as well as the family's home. She could be made bankrupt.
(2) He will need to point out the seriousness of the risks involved. The wife should be told the purpose of the proposed new facility, the amount and principal terms of the new facility, and that the bank might increase the amount of the facility, or change its terms, or grant a new facility, without reference to her. She should be told the amount of her liability under her guarantee. The solicitor should discuss the wife's financial means, including her understanding of the value of the property being charged. The solicitor should discuss whether the wife or her husband has any other assets out of which repayment could be made if the husband's business should fail. These matters are relevant to the seriousness of the risks involved.

(3) The solicitor will need to state clearly that the wife has a choice. The decision is hers and hers alone. Explanation of the choice facing the wife will call for some discussion of the present financial position, including the amount of the husband's present indebtedness, and the amount of his current overdraft facility.

(4) The solicitor should check whether the wife wishes to proceed. She should be asked whether she is content that the solicitor should write to the bank confirming he has explained to her the nature of the documents and the practical implications they may have for her, or whether, for instance, she would prefer him to negotiate with the bank on the terms of the transaction. Matters for negotiation could include the sequence in which the various securities will be called upon or a specific or lower limit to her liabilities. The solicitor should not give any confirmation to the bank without the wife's authority.

The solicitor's discussion with the wife should take place at a face-to-face meeting, in the absence of the husband. The solicitor's explanations should use non-technical language.

The solicitor should obtain from the bank any information he needs. If the bank fails for any reason to provide information requested by the solicitor, the solicitor should decline to provide the confirmation sought by the bank.

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