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Etridge: thought it was all clear? What about innocent representation?

Just when it looked like there was little else to say about undue influence, the Court of Appeal decided to explore its relationship with misrepresentation. Can innocent misrepresentation permit the victim to set aside a guarantee?

Royal Bank of Scotland v Chandra [2011] EWCA Civ 192 concerned a wife’s appeal against the first instance decision that RBS could enforce a personal guarantee and a second legal charge, which she and her husband had given to secure the borrowings of their company. It was accepted that as the debts related to a company owned by the wife jointly with her husband the presumption of undue influence did not arise. The CoA provided guidance on the relationship between the doctrine of undue influence and misrepresentation. The Court had to consider if the husband’s statement that £700,000 would be sufficient to complete the company’s redevelopment project. When it transpired that this amount was insufficient, it amounted to undue influence or a material misrepresentation which induced his wife to sign a guarantee on her home. Lord Justice Patten giving the lead judgment (with which Lord Justice Ward and Lady Justice Black agreed) at paragraph 32, states:

“I therefore accept that equity will intervene in respect of guarantees which have been procured by misrepresentation (including innocent misrepresentations) in the same way that it will set aside guarantees procured by an exercise of undue influence. The two are not the same, although in certain cases they may overlap. Undue influence is concerned with the abuse of a relationship of trust and confidence by the husband exercising control over the will of the wife in order to procure her consent to the guarantee. In a case of misrepresentation that consent has been procured not by the exercise of some form of pressure or domination but by the making of a false statement which the wife in the relationship of trust has relied upon.”

In holding that the wife had not been induced by misrepresentation, Lord Justice Patten at paragraph 38 repeated the message given by Lord Nicholls in Royal Bank of Scotland Plc v Etridge (No.2) [2001] UKHL 44, [2002] 2 A.C. 773; over-optimism is different from undue influence, which involves a breach of fiduciary duties. Lord Nicholls had said at paragraphs 32-33 of his speech:

“ I add a cautionary note, prompted by some of the first instance judgments in the cases currently being considered by the House. It concerns the general approach to be adopted by a Court when considering whether a wife's guarantee of her husband's bank overdraft was procured by her husband's undue influence. Undue influence has a connotation of impropriety. In the eye of the law, undue influence means that influence has been misused. Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be only natural. Courts should not too readily treat such exaggerations as misstatements.
Inaccurate explanations of a proposed transaction are a different matter.”

Misrepresentation depends upon a false statement of a present fact, not opinion, anticipated future facts, intention or the law. The Court held that Mr Chandra’s statement was a forecast, rather than a representation of present fact. It was a statement that had to be treated by Mrs Chandra as subject to an obvious reservation about its accuracy. Accordingly, the appeal was dismissed. The decision provides the following useful guidance:

(1) A relationship of trust and confidence between two parties was recognised in equity as being fiduciary in nature. This includes an obligation to act in good faith and to avoid conflicts of interest.

(2) Not every failure by a fiduciary would amount to a breach of duty. A fiduciary who acted negligently but in good faith was not unfaithful and committed no equitable wrong.

(3) Equity would intervene in respect of guarantees which had been procured by misrepresentation, including innocent misrepresentations, in the same way as it would to set aside guarantees procured by an exercise of undue influence.

(4) Undue influence was concerned with the abuse of a relationship of trust and confidence by the husband exercising control over the will of the wife in order to procure her consent to the guarantee. In a case of misrepresentation that consent had been procured not by the exercise of some form of pressure or domination but by the making of a false statement which the wife in the relationship of trust had relied upon.

(5) For a person’s conduct to fall within the category of undue influence it must be unconscionable for that person or any other who has notice of his conduct to seek to rely on the effect of what has been done.

A recession inevitably brings with it a substantial increase in the enforcement of guarantees and charges securing business debts. RBS v Chandra is likely to be the first of many attempts to expand the circumstances in which the impact of such transactions can be avoided.       

Article by Morayo Fagborun Bennett