In the Court of Appeal case of Bank of China (Hong Kong) Limited v. Well Lok Printing & Others HCMP 3925 of 2002, the Court considered the situation for the presumption of undue influence to arise and the bank’s duty to take reasonable steps to ensure that there was no undue influence.

Background of the Case

The husband and wife purchased a property in joint names as their family home (the “Property”).  The wife was not required to make any financial contribution towards the Property or the mortgage.  However, she was required to agree to have the Property charged to the bank as security for loans and banking facilities (“the Charge”).  The husband applied for and obtained an instalment loan and an overdraft facility from the bank. The Charge was executed by the husband and wife with the husband being the borrower and the Property being charged by an all-monies legal charge.

The appeal is concerned with whether the Charge was valid and enforceable against the wife.  The two main issues the Court of Appeal had to rule on was whether the wife executed the Charge under the undue influence of the husband and whether the bank failed to take reasonable steps to bring home to the wife her exposure of risks under the Charge.

Undue Influence

For the presumption of undue influence to arise, it is necessary for the wife to establish not only that she reposed trust and confidence in the husband in the management of her financial affairs but also that the transaction could not be readily explicable by the relationship of the parties.

The Court held in adopting the English House of Lords case of Royal Bank of Scotland PLC v Etridge that there is an assumption in every case in which a wife and husband are living together that there is a reciprocal trust and confidence between them.

However, in the ‘ordinary’ course, the fortunes of husband and wife are bound up together.  If the husband’s business is the source of the family income, the wife has a lively interest in doing what she can to support the business.  A surety of this character is not to be regarded as a transaction which, failing proof of the contrary, is explicable only on the basis that it has been procured by the exercise of undue influence by the husband.

Out of the Ordinary

The Court, relying on the facts of Etridge, gave an illustration of what may be considered to be out of the ‘ordinary’.  A relationship, in which a wife not merely disinclined to second-guess her husband on matters of business, but appears to have regarded herself as obliged not to do so, would be considered as one out of the ordinary.

The Court in this case found that the wife’s education was fairly limited. She came to Hong Kong from mainland when she was 11 and married her husband 4 years later. She was a very traditional Chinese woman and a submissive wife who always followed her husband’s decisions.  The Court considered that the circumstances of this case are such as to take it out of the ‘ordinary’.  Therefore, it was held that the presumption of undue influence arose as between the husband and the wife.

Reasonable Steps

In order to rebut the presumption, the bank must show that it has taken “reasonable steps to satisfy itself that the wife has had brought home with her, in a meaningful way, the practical implications of the proposed transaction.”  If the wife had been advised by her own solicitors, it would have facilitated the bank’s task in rebutting the presumption.  However, in the present case, the explanation of the Charge had been given to the wife by the bank’s solicitors.  It was held that where a solicitor accepts instructions to advise the wife (whether or not he may also be acting for the husband or the bank if no conflicts of duty or interest arise), he assumes responsibilities directly to her, both at law and professionally.  The bank (or the bank’s solicitors) would have a duty to provide ‘sufficient’ explanation of the implications of the proposed transaction and that ‘sufficiency’ has to be gauged in the context of the particular audience, i.e. the particular attributes or inadequacies of the wife.  In that respect, the Court found the explanation provided by the bank’s solicitors to be woefully inadequate in bringing home to the wife the implications of the proposed transaction. As a result, the Court concluded that the Charge should be set aside in favor of the wife

Notes to Lenders

Etridge has given a guideline as to what steps should be followed by the bank to minimize the risk of the wife claiming that she is not legally bound by the documents. These include:-

1.       The bank should communicate directly with the wife, informing her that it will require written confirmation from a solicitor acting for her to the effect that the solicitor has fully explained to her the nature of the documents and the practical implications they will have for her.

2.       The wife must have the opportunity to nominate her own solicitor and be advised independently on her legal position. The solicitor must meet with the wife without the husband or the lender being present.

3.       The bank should provide the wife’s solicitor with all relevant financial information such as: a copy of any application form submitted by the husband; the purpose for which the proposed new facility has been requested; the amount and terms of any new or increased facility; the total amount of the husband’s indebtedness; the amount of his current overdraft facility; and full details of the guarantee or security being requested from the wife. If the husband does not consent to the disclosure of such information, the bank should not proceed with the transaction.

The bank should obtain written confirmation from the wife’s solicitor that he has advised the wife appropriately.  It should not proceed with the legal charge without this confirmation.