Conflict of interest between borrower and spouse

Claims regularly arise out of problems over enforceability of securities.  Some of these problems arise out of alleged deficiencies in advice tendered to the parties or information reported to the lender.  The duties of solicitors in relation to the latter have been the subject of a great deal of litigation in recent times.  A certain amount of this litigation has gone on south of the border, however it has a potential impact here.

Two cases raise issues of interest and concern.  The decisions in these cases do not necessarily represent the law in Scotland, but it is well worth considering the cases to establish whatever lessons can be learned.

The case of Royal Bank of Scotland plc v Etridge (No 2), Times, August 17, 1998 (CA) involved spouses who were contesting proceedings for repossession of matrimonial homes on the basis that their signature of mortgages were procured by misrepresentation or undue influence on the part of the borrower.

How could solicitors be at risk in this situation?  A lending institution will inevitably consider alternative remedies in the event of its inability to enforce a security.  If the security relates to matrimonial property and the difficulty in enforcing the security arises because the spouse alleges that the security was procured by misrepresentation or undue influence on the part of the borrower or lender, the lender may well consider possible remedies against the solicitor instructed to advise the spouse and procure the spouse’s signature.

Zwebner v Mortgage Corporation Limited [1997] P.N.L.R. 504, Lloyd, J., Ch D. involved a loan to be secured over a property belonging to the borrower and another party.  The solicitor instructed to act for the lender issued a report on title in which there was an undertaking that all appropriate documents would be properly executed on completion.  The solicitor sent the security deed to the borrower for execution by both the borrower and his co-proprietor.  On the borrower’s insolvency, the co-proprietor alleged that she was not bound by the security deed as her signature on the security deed had been forged.  The lender was successful in recovering from the solicitor on the basis that, whether or not the solicitor had been at fault, the report on title amounted to a warranty that the security deed had been properly executed.

The terms of the judgment suggest that in England and Wales at least, the solicitor’s duty of care to the lender may require the solicitor to be satisfied that the signatures of all signatories to a security deed are genuine.

It is beyond the scope of this page to consider the implications of these decisions in legalistic terms.  While readers are encouraged to consider the full implications of the decisions, the comments here are limited to managing risk.

The objective as always must be to do as much as reasonably practicable to minimise the risk of a problem arising at all.  On this basis, should a problem still arise in spite of the precautions you have taken, you will be in a far stronger position to defend any claim.

The impact of the English cases may well be reflected in developments in the law here; in changes in the rules or practice regarding separate representation in security transactions and in changes in the terms of lenders’ instructions.  It is in the interests of practitioners to consider now what implications these developments and changes will have and to consider how the conduct of security work can be made as free of risk from the practitioner’s point of view.

What does this mean in practice?

There are many issues that need to be considered routinely when instructions from a lender involve arranging signature of security deeds.  A checklist which prompts you to consider relevant issues may be helpful.  This might include the following points:

• Are you quite clear which party/parties is/are your client(s)?  Lender, borrower, borrower’s spouse?  Are your instructions such that you could have a duty of care to more than one of these parties?
  
• Should you act for/advise more than one party?
  
• Is there an actual conflict of interest?  If so, have you made it clear to the other parties that they should seek separate legal advice?
  
• Has the borrower’s spouse been advised to take independent legal advice and, if so, has such advice been given?

If you are acting for the spouse

• Have you ensured that the spouse knows and understands who has instructed you and the basis on which advice has been given
  
• Are you satisfied that the spouse was not subject to undue influence on the part of the borrower or the lender?
  
• Have you considered the implications of Rule 7 of the Conflict of Interest Rules ( issuing deeds etc for signature by a party who has chosen not to instruct a solicitor)?
  
• Have you ascertained whether the spouse will receive direct financial benefit from the loan to which the security relates?
  
• Have you ascertained whether the spouse is involved in any way in the business to which the loan relates?
  
• Have you made other enquiries with a view to establishing whether the spouse might be advised not to sign the security deed? (Note: it may be only by examining the finances/accounts of the borrower’s business that meaningful advice could be given in this regard)?
  
• Has the spouse been advised of the implications of securing business borrowings over the matrimonial house/other matrimonial property?
  
• Has the spouse been advised that the security is an all sums security/a security for a fixed amount?
  
• Have you ensured that there are letters/attendance notes recording advice given?

When acting for the lender?

• Have you considered whether it may be appropriate to qualify your report on title (to note, for instance, concerns in respect of potential conflict of interest)?
  
• If your instructions require you to warrant that the security deeds are properly executed, how have you satisfied yourself before reporting to the lender that the signatures are genuine?  If you cannot warrant that signatures are genuine (eg by seeing the spouse sign and seeing evidence of identity), do not do so.

Remember, if a claim arises and the cause of the claim is or is attributable to breach of the Conflict of Interest Practice Rules, the self-insured amount will be double the standard amount.

For guidance see comments at F965 of Parliament House Book (and the Solicitor’s Professional Handbook) under “Home Secured for Business Loan”.

The information in this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law and (b) is necessarily of a generalised nature.  It is not specific to any practice or to any individual and should not be relied on as stating the correct legal position. 

Alistair Sim is Associate Director of Sedgwick Professions