CIBC Mortgages plc v Pitt[1993] UKHL 7(21 October 1993) is a decision of the House of Lords relating to undue influence.[1] The decision confirmed that a person did not need to suffer "manifest disadvantage" under a transaction in order to challenge it for actual undue influence (as opposed to "presumed" undue influence).[2][3]
In 1986 Mr Pitt told Mrs Pitt that he would like to borrow some money on the security of the family home and to use the loan to buy shares on the stock market. 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 eventually agreed to the suggestion. The Pitts had originally purchased the house 1970; they still lived in it, with their two adult daughters. In 1986 the property was valued at £270,000, the only encumbrance on it being a mortgage in favour of a building society for the modest sum of £16,700.[4]
Mr Pitt made an application for a loan with CIBC Mortgages plc which 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." 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 although she did see the first and last pages.[4]
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 the family home 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."
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. On 31 July 1986 the legal charge over the family home was executed. It was in standard form. Mrs Pitt signed the legal charge but 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.[4]
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. At the time of the trial in July 1992, the total sum owing under the legal charge was nearly £219,000, which exceeded the value of the family home.[4]
At the trial before Mr Recorder Davies, 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. CIBC, in addition to denying the claims made by Mrs Pitt, contended that the transaction was not manifestly disadvantageous to Mrs Pitt and that, following National Westminster Bank plc v Morgan [1985] AC 686, the claim based on undue influence could not succeed.[4]
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 the law as he understood it Mrs Pitt could not set aside the transaction for either misrepresentation, or undue influence (actual or presumed).[4]
The sole reasoned judgment was delivered by Lord Browne-Wilkinson, with whom all the other law lords agreed. After reviewing the background, his Lordship focussed his analysis on two key points: (1) whether "manifest disadvantage" needed to be demonstrated, and (2) whether CIBC, as a third party, was on notice of any undue influence.
Manifest disadvantage requirement
After reviewing all of the relevant case law, Lord Browne-Wilkinson concluded that there was no requirement to demonstrate manifest disadvantage where actual (as opposed to presumed) undue influence was established. He said
In relation to manifest disadvantage 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.[5] 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.
Notice
Having made that determination Lord Browne-Wilkinson held that Mrs Pitt would have been entitled to set aside the transaction against her husband. However, in order to succeed she would need to be able to set aside the transaction against CIBC, who was an innocent third party. In order to do so, CIBC would need to be on notice of the undue influence.
The trial judge had found as a fact that Mr Pitt was not the agent of CIBC, and so his knowledge of the undue influence could not be imputed to the bank. Accordingly, Mrs Pitt needed to show that the facts known to the plaintiff should put it on inquiry so as to fix it with constructive notice. However, there was nothing in the fact pattern which did so:
So far as the plaintiff [CIBC] 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.
Accordingly, Mrs Pitt's claim failed. Even though she had been unduly influenced by her husband, the bank had no notice of this, and was accordingly its rights were not affected.
Timing
The judgment was delivered on the same day as the House of Lords decision in Barclays Bank plc v O'Brien[1993] UKHL 6(21 October 1993). However, the decision in O'Brien was handed down first, and accordingly, in his speech Lord Browne-Wilkinson refers to his reasoning in the O'Brien case. The composition of the judges in the House of Lords was identical in both cases.
Commentary
The case is less relevant after the decision at the same, final, level in Royal Bank of Scotland plc v Etridge (No 2)[2001] UKHL 44(11 October 2001) reformulating relevant tests for undue influence in third party (and potentially disinterested spouse/co-owner) cases involving bank loans. Accordingly, the decision in Pitt is normally only cited today by textbooks as supplementary authority for more general propositions, such as the absence of any requirement for direct threats to establish undue influence, or the fact that a joint loan to husband and wife will not of itself put the bank on inquiry of potential undue influence.[6]
Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.
Bristol and West Building Society v Mothew [1996] EWCA Civ 533 is a leading English fiduciary law and professional negligence case, concerning a solicitor's duty of care and skill, and the nature of fiduciary duties. The case is globally cited for its definition of a fiduciary and the circumstances in which a fiduciary relationship arises.
Lloyds Bank plc v Rosset[1990] UKHL 14 is an English land law, trusts law and matrimonial law case. It specifically deals with the translation into money of physical contributions from a cohabitee or spouse, under which its principles have been largely superseded.
Lloyds Bank Ltd v Bundy is a decision of the English Court of Appeal in English contract law, on undue influence. One of the three judges hearing the case, Lord Denning MR advanced the argument that under English law, all impairments of autonomy could be collected under a single principle of "inequality of bargaining power."
Unconscionability in English law is a field of contract law and the law of trusts, which precludes the enforcement of voluntary obligations unfairly exploiting the unequal power of the consenting parties. "Inequality of bargaining power" is another term used to express essentially the same idea for the same area of law, which can in turn be further broken down into cases on duress, undue influence and exploitation of weakness. In these cases, where someone's consent to a bargain was only procured through duress, out of undue influence or under severe external pressure that another person exploited, courts have felt it was unconscionable to enforce agreements. Any transfers of goods or money may be claimed back in restitution on the basis of unjust enrichment subject to certain defences.
City of London Building Society v Flegg[1987] UKHL 6 is an English land law case decided in the House of Lords on the relationship between potential overriding interests and the concept of overreaching.
Royal Bank of Scotland plc v Etridge [2001] UKHL 44 is a leading case relevant for English land law and English contract law on the circumstances under which actual and presumed undue influence can be argued to vitiate consent to a contract.
Bank of Credit and Commerce International S.A. v. Aboody [1992] 4 All ER 955 is an English contract law case relating to undue influence.
Barclays Bank plc v O’Brien[1993] UKHL 6 is an English contract law case relating to undue influence. It set out the basic categories of undue influence as,
Bristol & West Building Society v Henning [1985] EWCA Civ 6 is an English land law case that holds a person can consent to give up the right to an overriding interest in land, that will bind third parties, such as banks, that purchase a property. Although dealing with unregistered land, it is equally applicable in the case of registered land and now falls under the Land Registration Act 2002.
Link Lending Ltd v Bustard [2010] EWCA Civ 424 is an English land law case, concerning actual occupation in registered land and the vulnerable, in this case a defrauded person suffering from a mental syndrome who would have had little concept of what was occurring.
Midland Bank plc v Cooke [1995] is an English land law case, concerning constructive trusts; and at first instance proven undue influence in law as to a secured business loan and later refinance.
National Provincial Bank Ltd v Ainsworth [1965] is an English land law and family law case, concerning the quality of a person's interest in a home when people live together, as well as licenses in land.
Mortgages in English law are a method of raising capital through a loan contract. Typically with a bank, the lender/mortgagee gives money to the borrower/mortgagor, who uses their property/land/home as security that they will repay the debt and any relevant interest. If the mortgagor fails to repay, then the mortgaged property which has been used as security may be subject to various mortgagee remedies allowing them to retrieve the debt. Mortgages are an important part of English land law and property law. These concern, first, the common law, statutory and regulatory rules to protect the mortgagor at the time of concluding the mortgage agreement. Second, English law defines and restricts the process for taking possession of property in the event of default. Third, it places duties on mortgagees on the price it achieves when selling property.
Thompson v Foy[2009] EWHC 1076 (Ch) is an English land law case concerning the right of a person with an overriding interest in a home and deals with a family arrangement for a house to be a gift transferring from a mother to a daughter and the trust between the two parties that the daughter would pay the mother her sum to buy out her share of the property.
National Westminster Bank plc v Morgan[1985] UKHL 2 is a judicial decision of the House of Lords relating to English contract law and the doctrine of undue influence. The case is most well known for the comments of Lord Scarman about the supposed requirement of "manifest disadvantage" to set aside a contract for undue influence.
AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58 is an English trust law case, concerning the applicable principles of causation for a breach of trust. It held that a "but for" test of causation applies for equitable compensation.
Undue influence in English law is a field of contract law and property law whereby a transaction may be set aside if it was procured by the influence exerted by one person on another, such that the transaction cannot "fairly be treated the expression of [that person's] free will".
Bank of Montreal v Stuart is a decision of the Judicial Committee of the Privy Council on appeal from the Supreme Court of Canada. It deals with the principle of undue influence in relation to contracts, in the particular context of dealings between spouses. Decided in 1910, the case continues to be cited in the courts in Canada and in England and Wales.
Palk v Mortgage Services Funding plc [1993] Ch 330 was a judicial decision of Court of Appeal of England and Wales relating to the enforcement of mortgages. The case concerned seeking an order for sale of the property through the courts, but it was slightly unusual in that it was the mortgagors who were seeking the order for sale, but the finance company holding the mortgage who were opposing it.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
