Banking business, generally speaking, is mainly based on banking laws and banking customary practices. Due to this fact, in many cases or differences between banks and their customers the issue of undue influence has been raised by customers in many instances.
What is the meaning of “undue influence” and what are the limits of its extent? We believe that, this is a very important issue to customers and more further to banks and the banking industry in Bahrain.
The meaning of “undue influence” has been discussed in detail in a famous English case “Morgan’s case”. In this case, the husband was facing difficulties in his business and was unable to meet repayments due under a mortgage secured over the home which he owned jointly with his wife.
As a result, the mortgagee commenced proceedings to take possession of the home, and to avert that possibility the husband made refinancing arrangements with a bank, the refinancing being secured by a legal charge in favor of the bank.
The bank was made aware of the urgency of the matter and later the bank manager called at the home to get the wife execute the charge. During the bank manager’s brief visit to the home the wife made it clear that she had little faith in her husband’s business ventures and that she did not want the legal charge to cover his business liabilities.
The bank manager assured her in good faith but incorrectly that the charge only secured the amount advanced to refinance the mortgage. In fact, the charge was by its terms unlimited in extent and therefore could extend to all the husbands’ liabilities to the bank, although it was the bank’s intention to treat it as limited to secure the amount required to refinance the mortgage.
The wife did not receive independent legal advice before signing the charge. The bank subsequently obtained an order for possession of the home after the husband and wife fell into arrears with payments. Soon afterwards the husband died without owing any indebtness to the bank for business advances. The wife appealed against the order for possession, contending that she had signed the charge because of undue influence from the bank and that therefore it should be set aside.
The bank contended that the defense of undue influence could only be raised when a defendant had entered into a transaction which was manifestly disadvantageous to him and, since the husband had died without business debts owing to the bank, the wife was not manifestly disadvantaged but in fact had benefited under the transaction because it had averted the proceedings for possession by the prior mortgagee.
The Court of Appeal allowed the wife’s appeal, holding that a special relationship had been created which raised the presumption of undue influence which the bank was unable to rebut because it had failed to advice the wife to seek independent legal advice.
The bank appealed successfully to The House of Lords. The House of Lords held that the facts were a far cry from a relationship of undue influence or from a transaction in which an unfair advantage was obtained by one party over the other. Further the charge, limited as it was by the bank manager’s declaration to securing the loan to refinance the mortgage, was not disadvantageous to the wife. It meant for her the rescue of her home upon the terms sought by her, a short term loan at a commercial rate of interest.
The bank manager never crossed the line. Nor was the transaction unfair to the wife. The bank was, therefore, under no duty to ensure that she had independent advice. It was an ordinary banking transaction whereby the wife sought to save her home, and she obtained an honest and truthful explanation of the bank’s intention which, notwithstanding the terms of the charge, was correct. The bank had not sought to make the wife liable, or to make her home the security, for any debt of her husband other than the loan and interest necessary to save the house from being taken away from them in discharge of their indebtness to the prior mortgage.
The message we learn from this case, both customers and banks need to bank on good faith without taking an opportunity at the cost of the other. Those who undertake or look for banking must come with clean hands & clean hearts, otherwise to be questionable before Courts for undue influence or unfair disadvantage.
We believe that, banks are required to take more care and prepare accurate and appropriate legal documentation for all banking transactions, moreover, should excel in explaining all necessary details to customers. Full transparency, full disclosure, full faith and good faith shall cement the fiduciary and trustworthy bond between the banking parties.