Barclays Bank plc v O'Brien [1994] 1 AC 340 (HL)

Facts

• The case involved a security transaction where a wife provided a guarantee for her husband's business debts to Barclays Bank.
• The issue arose concerning whether the wife’s consent to the transaction was obtained through undue influence or misrepresentation.
• The bank accepted the wife’s guarantee without ensuring that her consent was informed or that she was free from undue influence.
• Similar principles apply to other non-commercial surety relationships, such as those involving elderly parents and children.
• The facts highlighted deficiencies in the bank's procedures for obtaining security from individuals in relationships of trust and confidence.

Issues

1. Whether the bank could be fixed with constructive notice of undue influence or misrepresentation exerted by one party over another in surety transactions.
2. What steps a bank must take to ensure the enforceability of security where there is a risk of undue influence.
3. Whether the transaction could be set aside due to failure by the bank to ensure the surety’s informed consent.

Decision

• The House of Lords held that banks are put on inquiry and have constructive notice when a person in a non-commercial relationship, such as a wife standing surety for her husband's debts, enters into a transaction.
• Once on inquiry, the bank has a duty to take reasonable steps to ensure the surety’s consent is properly informed and free from undue influence.
• The case clarified that if the bank fails to take these reasonable steps, the security may be set aside.
• The recommended procedure for banks is to require independent legal advice for the surety and to ensure the advice is properly given and confirmed to the bank.

Legal Principles

• Actual undue influence requires proof of improper pressure; presumed undue influence arises from relationships of trust and questionable transactions.
• Constructive notice is imputed when the bank is on inquiry, imposing a duty to ensure informed consent from the surety.
• Reasonable steps to discharge this duty include independent legal advice and confirmation that the surety fully understood the transaction and its implications.
• The later case of Royal Bank of Scotland plc v Etridge (No. 2) [2002] 2 AC 773 affirmed and clarified these principles, emphasizing independent legal advice and clear procedures for banks.

Conclusion

Barclays Bank plc v O’Brien established that banks must take reasonable precautions to ensure sureties in relationships of trust are properly informed and free from undue influence; failure to do so may render the security unenforceable, protecting vulnerable parties and clarifying banks’ responsibilities in such transactions.