Royal Bank of Scotland Plc v Etridge (No 2) [2001] UKHL 44

Facts

• The case concerned a series of joined appeals where wives had mortgaged their homes to secure loans for their husbands’ businesses.
• The transactions typically involved a high degree of trust and risk of undue influence, particularly in spousal or other close relationships.
• The banks involved sought to enforce security over the matrimonial homes, while the sureties (mostly wives) claimed undue influence.

Issues

1. Whether a presumption of undue influence arises in spousal guarantee transactions.
2. What circumstances put banks “on inquiry” about possible undue influence.
3. What steps a creditor must take to avoid being affected by undue influence.
4. Whether the requirement for “manifest disadvantage” was applicable or if a lower threshold applied.

Decision

• The House of Lords clarified that a presumption of undue influence does not arise automatically in spousal relationships but may do so if there is evidence of trust and confidence.
• Banks are put “on inquiry” when a transaction appears not to be to the obvious financial advantage of one party and there is a substantial risk of undue influence.
• Banks must take reasonable steps to ensure that the surety obtains independent legal advice; this generally involves a private meeting with a solicitor without the other spouse present.
• The requirement for “manifest disadvantage” was replaced with the test of whether the transaction “calls for explanation.”
• If a solicitor confirms that informed consent was given, the bank’s security will generally be protected.

Legal Principles

• Undue influence is classified as actual (requiring proof of coercion) or presumed (arising from relationships of trust or confidence).
• Certain relationships, such as solicitor-client, automatically give rise to a presumption of undue influence; spousal relationships do not unless proven factually.
• A presumption of undue influence is rebuttable by showing the influenced party acted with full understanding and free will, usually demonstrated through independent legal advice.
• Financial institutions are under a duty to take reasonable precautions to ensure informed consent where a risk of undue influence exists.
• The “calls for explanation” standard lowers the threshold for establishing undue influence, acknowledging that arrangements may require explanation even without clear disadvantage.

Conclusion

The decision in Royal Bank of Scotland Plc v Etridge (No 2) significantly developed the doctrine of undue influence in equity, establishing practical duties for banks to protect vulnerable parties in guarantee transactions and clarifying that independent legal advice and the “calls for explanation” test are central to rebutting presumed undue influence.