In this case, the Court of Appeal considered whether a husband’s over-optimistic assessment of a business venture amounted to a misrepresentation, entitling his wife to have her guarantee set aside.
RBS entered into a loan agreement with a company called BPC Hotels Limited (“BPC”), of which the Defendants were both directors, for the acquisition and development of a hotel by BPC.
Under the loan agreement, RBS obtained a debenture over the fixed and floating charges of BPC, together with a first legal charge over the development property. However, by September 2001, the cost of the development had risen and a second finance agreement was entered into under which RBS would provide BPC with a further £700,000. As security for this further amount, the Defendants agreed to give personal all monies guarantees limited in amount to £700,000, which were secured by way of a second legal charge over the matrimonial home. These were executed on 30 October 2001.
There were further increased costs, and BPC requested further finance from RBS which RBS agreed to on terms that the Defendants would increase their personal guarantees from £700,000 to £1.15 million, secured by a second legal charge over their home. These were executed on 20 May 2003.
The additional finance did not provide sufficient monies to complete the development, and a formal demand was made in August 2003 for the repayment of the loan, and administrative receivers were appointed. The property was eventually sold in March 2004 for £13.5 million, leaving a shortfall of £4.118 million.
The High Court’s Decision
Mrs Chandra alleged that both guarantees which she signed had been procured by the undue influence of her husband, of which the bank had notice.
At first instance, the High Court found in favour of Mrs Chandra in relation to the second guarantee, but rejected her arguments in respect of the first guarantee. In relation to the first guarantee, the High Court found that it had not been procured by any undue influence or misrepresentation on the part of Mr Chandra and that, even if it had been, RBS was not on notice of this given the steps which had been taken using solicitors to explain to Mrs Chandra what the guarantee involved.
The High Court found that although Mrs Chandra was a director of BPC, she placed trust and confidence in her husband in relation to business matters. She had no involvement in the hotel development; instead Mr Chandra had sole charge of all aspects of BPC’s business including its finance. Mrs Chandra therefore relied upon and depended on Mr Chandra for accurate information about the development.
It also found that, before the guarantee had been given, Mr Chandra was confident that £700,000 would be sufficient to complete the development. This view was also shared, at the time, by RBS’s surveyors. However, whilst Mr Chandra believed £700,000 would be enough to complete the development, Mrs Chandra knew there was risk involved and did not understand Mr Chandra’s statement to be said as a complete certainty.
In relation to constructive notice, the High Court found that, although it would have been possible for RBS to have implemented the new guidelines set out in Royal Bank of Scotland v Etridge (No.2)  AC 773 before the Guarantee was entered into; it was not reasonably practicable for it to have done so. By applying pre-Etridge principles based on Barclays Bank v O’Brien  1 AC 180, it had done enough to avoid having constructive notice of any right Mrs Chandra had to have the first guarantee set aside on the grounds of undue influence or misrepresentation.
Mrs Chandra appealed against the High Court’s decision in respect of the first guarantee, and on the basis that RBS had not followed the steps set out in Etridge. Accordingly, RBS should be fixed with constructive notice of any undue influence or misrepresentation by her husband that led her to give the first guarantee.
The Court of Appeal’s Decision
Mrs Chandra’s appeal was dismissed by the Court of Appeal.
The Court accepted 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 undue influence. However, it was held that these two are not the same; although in some 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; and
In the case of a misrepresentation, 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.
It makes no difference whether one treats the representation given by Mr Chandra as a forecast of future costs or as a statement of what his own belief was in respect of the likely future costs; Mrs Chandra did not ask her husband for a breakdown of his calculations, nor did she ask him whether it could be said with confidence that future finance would not be necessary. The Court held that Mrs Chandra asked for, and was given, Mr Chandra’s conclusions; even if it can be said that his view was negligent, it does not amount to a misrepresentation.
The Court confirmed that whilst deliberate concealment can lead to a finding of undue influence, inadvertent non-disclosure should not as “they are quite different in nature”. The Court held that Mr Chandra did not give his wife an inaccurate explanation of the transaction; the most he can be accused of is over-optimistic assessments of the chances of a future overspend. Whilst this could give rise to a claim for a breach of a duty of care, it does not amount to undue influence.
As there was no misrepresentation (and no undue influence) the Court did not need to decide whether RBS benefiting from the guarantee should have followed the guidelines set out in Etridge, so as to avoid being fixed with constructive notice of any rights that the wife had to require the first guarantee to be set aside on grounds of undue influence or misrepresentation.
This case provides a useful review of the situation in which a guarantee is procured by undue influence, and where it is procured by a misrepresentation; both of which can give rise to the guarantee being set aside. However, whilst it is still necessary to ensure that a guarantee has not been procured by way of undue influence of misrepresentation, if a husband inadvertently fails to disclose something to his wife, this does not amount to misleading, deliberately concealing information from or misstating the position to his wife and so is not a misrepresentation.
The Court acknowledged that many wives place confidence and trust in their husbands in relation to their financial affairs. However, as confirmed in Etridge, a balance must be struck between the need to ensure that banks can successfully lend on the security of jointly owned matrimonial assets and the need to prevent wives from being taken advantage of by their husbands.
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