Citation(1996) 8 SAcLJ 429
Published date01 December 1996
Date01 December 1996

Equity’s reach has never been broader than it is today. In what follows, I hope to highlight some general trends as well as focus on certain specific recent developments that have occurred both in Singapore and abroad.

Chancery work used to revolve around estates and wills. But having had Harman J tell us in 1951 about the continued fertility of equity, we should not be surprised that commercial fraud and disputes consume most of our time today. Some might say that this is because Equity has reverted to the length of the Chancellor’s foot; and its innate flexibility allows us to deal with complex commercial wrongdoing in a way that the common law cannot — all at the expense of certainty. However, this is to do an injustice to judges and academics around the world who have added great rigour and discipline to the use of equitable doctrine.1

In the much abused notion of a fiduciary relationship, for example, Professor Finn has constantly warned against the convenient use of the fiduciary label when seeking to impose equitable duties.2 He saw this as an abrogation of a duty to create new legal or equitable obligations which could exist outside the fiduciary relationship. Perhaps in response to such criticism, we see evolving doctrines of good faith, more so unconscionability and even sui generis duties in particular instances, such as a creditor’s duty to disclose all unusual and expected facts as they pertain to a surety or guarantor’s obligation. In Levett v Barclays Bank Plc,3 an English court, for the first time since 1946, applied the very old case of Hamilton v Watson4 and the more recent judgment of Gibbs CJ in the Australian High Court in Commercial Bank of Australia Ltd v Amadio,5 in setting aside security

given by an elderly couple to the bank on the basis that the bank had not disclosed to them all material and unusual features in the loan that was given to a third party, solicitors to the elderly couple. Although it has repeatedly been stated that there is no need to disclose facts relating to the credit status of the principal debtor, even if the debtor’s account is overdrawn,6 here the facts were sufficiently unexpected for the bank to owe a duty of disclosure, no mention here was made of a fiduciary duty, to the elderly couple.

In short, we need not resort to the fiduciary institution to impose duties on another party. Indeed, it may be argued that a fiduciary duty is not a duty at all, but rather a disability.7 A fiduciary is proscribed from allowing his interest and duty to conflict, nor can he make a secret profit. He is ‘duty’ bound to subject his own self interest to the beneficiary. A person should only be classified as a fiduciary when he or she is under such intense scrutiny. Someone who is not in such a position may yet owe positive duties to another. Consequently, between the two extremes of unabrogated contractual freedom and fiduciary obligation, lie duties of good faith, and equitable restrictions on freedom of action. One cannot, for example, exercise undue influence or misrepresent facts. Nor, increasingly, can one act unconscionably or subject the other contracting party to illegitimate pressure. While economic duress is obviously of great importance, it possibly resides in the common law8 although its linkages with undue influence has been noted by many eminent jurists.9

Ultimately, however, rules can only take us so far. If equity is to do more than the common law, particularly to ameliorate its harshness, it has to retain broad standards, and surely standards of good behaviour and conscionable conduct are just as deserving of protection as the principle of freedom of contract.10 We clearly see this more discretionary side of Equity in Canada, Australia and New Zealand. Millett LJ in the English Court of

Appeal also seeks to redress what he terms the ‘stick-in-the-mud’ attitude of English courts towards equitable doctrine, which has perhaps become too rigidified.11 While we may have the luxury of choice, it is surely too simplistic to say as Lord Nottingham did in Maynard v Moseley12 that “the Chancery mends no man’s bargain.” The point is that a bargain requires both parties to exercise their free will, and sometimes even be in an equal bargaining position.

1. The position of banks in contracts of guarantee

In the spousal context, a husband may exercise undue influence over his wife when he asks her to give a guarantee on his behalf, or when she charges her share of the matrimonial home to the bank. The benefit of the guarantee or security accrues to the bank, the benefit of the loan to the husband. Two distinct relationships thus arise: between the husband and the wife, the issue is whether the husband exercised undue influence over the wife in procuring her signature or consent. Between the bank and wife, the question is whether the bank is tainted by the undue influence to which it is a third party.13

There are cases in which the bank is not a third party. The husband could be the bank’s agent, or the bank itself could end up in a fiduciary relationship vis a vis the wife.14 These are exceptional situations. Instead, Lord Browne-Wilkinson suggested in Barclays Bank Plc v. O’Brien that the principled basis for avoiding such agreements was via “the proper application of the doctrine of notice”15 To protect itself, banks were given certain guidelines whenever it knew of the relationship between the parties and consequently the substantial risk that the wife’s consent was not freely given, and the fact that the transaction was not on its face for the financial benefit of the wife.16 Lord Browne-Wilkinson expected banks to insist “that the wife

attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent advice.”17

These guidelines apply to transactions antedating O’Brien. Past transactions were to be examined on a case by case basis, bearing in mind that his Lordship intended to balance fairly the vulnerability of the wife and the practical problems faced by financial institutions taking third party security.18 Quite obviously, however, the reasonable steps propounded by his Lordship for future transactions are still highly relevant.19

The problem is, of course, our unfamiliarity with the concept of notice in commercial transactions. The judgment of Lindley LJ in Manchester Trust v Furness20 bears re-reading,

… as regards the extension of the equitable doctrines of constructive notice to commercial transactions, the courts have always set their faces resolutely against it. The equitable doctrines of constructive notice are common enough in dealing with land and estates, with which the court is familiar, but there have been repeated protests against the introduction into commercial transactions of anything like an extension of those doctrines, and the protest is founded on good sense. In dealing with estates and land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title: if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country.

Millett LJ, however, sees O’Brien restoring constructive notice to its rightful place in equity, as a flexible concept which can be applied in commercial transactions, although the duty to make inquiry is probably less onerous in such transactions due to their pressing nature.21 He did, however, have high hopes that O’Brien would at least require the bank to monitor the activities of the recommended independent solicitor, so that if the solicitor failed to make the necessary inquiries, the bank itself had to advise the wife not to give her consent. Indeed, it has even been argued that the bank assumes the role of surrogate debtor, having to counteract the undue influence exercised by the husband.22

Here, however, the law is in a state of flux. In a series of decisions in 1994 and 1995,23 the English Court of Appeal appeared to resist the notion that O’Brien required positive action on the part of banks vis a vis the surety. The net effect of these cases suggests that directly or indirectly informing the surety of the need for independent legal advice generally relieves the creditor of responsibility, even if the warning is ignored,24 and even if, when heeded, the advice is not in fact independent. Banks were entitled to rely on the solicitor’s assurance that he had properly advised the wife. A Millett LJ-led Court of Appeal has, however, more recently, revived the idea that the bank has to insist that the surety receive independent advice, and sometimes even ensure that she heeds the advice (which effectively means that the bank has to refuse her offer to provide a guarantee or security),25 although this more protective approach towards the surety may be due to the influence of the broader equitable doctrine of unconscionability, which has much in common with undue influence.26 This decision may put both the bank and advising solicitor in a very difficult position.

The third party volunteer is, however, liable regardless of notice. According to Fry J in Bainbrigge v Browne27 there is a presumption of undue influence “against the person who is able to exercise the influence … against every volunteer who claimed under him, and also against every person who claimed under him with notice of the equity thereby created, or with notice of the circumstances from which the court infers the equity.” Where the volunteer is concerned, notice is thus irrelevant. Put differently, liability is strict.

Banks, however, probably do provide consideration in this context28 and they should closely monitor the cases in England where O’Brien has been...

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