Risks in advising spouses – the Etridge effect

The recent case of Royal Bank of Scotland v Etridge (House of Lords, 11 October 2001) has once again highlighted the problems arising from a transaction in which a wife had agreed to grant a security to a lender over her share of the matrimonial home in order that her husband (or the husband’s company) could obtain further finance. While the case is generally referred to as Etridge there were a number of different cases heard at appeal.  Following attempts by the banks to enforce the charges, the wives argued that they had signed the charges under the undue influence of their husbands. Scots law was changed by the House of Lords in Scotland by Smith v Bank of Scotland to produce results in line with the English decision in Barclays Bank v O’Brien, albeit from a different theoretical basis.  Etridge had already been influential in the development of Scots law, being cited in Forsyth v Royal Bank, Wright v Cotias and Broadway v Clydesdale Bank

Much of the discussion in Etridge focused on the alleged deficiencies in the quality of legal advice given to the wives.   The speeches of a number of their Lordships pointed out that the current practice of giving legal advice is perfunctory and often honoured more in the breach than observance. “The system is a charade.

“In practice it provides little or no protection for a wife who is under a misapprehension about the risks involved or who is being coerced into signing. She may not even know the present state of her husband’s indebtedness”. (Lord Nicholls)

The content of the advice from the solicitor will be dependent on the circumstances of the case, but Lord Nicholls suggests a “core minimum” of advice:

• explain to the spouse the nature of the documents
• advise the spouse as to the implications of signature in practice: in particular, the fact that the spouse could lose his/her home in the event of the business underperforming – the spouse could, of course, ultimately face bankruptcy
• point out to the spouse the seriousness of the risks involved
• advise the spouse as to the reason for the new lending, the amount of the further lending and its principal terms
• advise the spouse that the lender might increase the amount of the lending, change the terms or even grant a further facility without any intimation to him/her. In terms of the Mortgage Code, lenders should no longer seek an unlimited guarantee from a cautioner/guarantor. Solicitors should therefore be aware that now an attempt to seek an unlimited guarantee should be seen as unusual.
• tell the spouse the amount of his/her liability
• discuss with the spouse his/her finances and the valuation of the property
• check whether there are any other assets which could be used to pay off the borrowings, in the event of the business failing
• advise the spouse that he/she has a choice – this will most likely require to proceed upon a discussion of the current levels of indebtedness
• seek the spouse’s confirmation that he/she wishes to proceed – solicitor should confirm that spouse is happy for confirmation to be given to the bank or whether he/she wishes the solicitor to negotiate the terms of the transaction

Such a discussion with the spouse should take place at a face-to-face meeting in the absence of the borrowing spouse.  In addition, in Lord Nicholls words, “It goes without saying that the solicitor’s explanations should be couched in suitably non-technical language. It also goes without saying that the solicitor’s task is an important one. It is not a formality”

In Scotland, the basis of the Smith decision was the creditor acting in good faith. In Forsyth, Wright and Broadway, Lord Macfadyen has interpreted this narrowly so that the creditor is entitled to assume that the spouse has been given advice where it appears to the lender that the same solicitor is acting for both spouses, even when that is not in fact the case. It seems that in Scotland the risk is more likely to lie with the solicitor rather than the lender.

Risk management action points

Their lordships have given their own risk management guidelines within the speeches in Etridge. Whilst only persuasive in Scotland it is likely that it will de facto set the standard north of the border as well.  Practitioners should familiarise themselves with those guidelines but should also be aware that:

1. Each subsequent case will turn on its own facts – the risk management must be proportionate to the facts.  Etridge does not provide a tick box checklist to complete protection against a claim
2. There are a number of additional risk management points that flow from the principal ones reviewed in Etridge, such as:

• The information that may have to be given to the spouse could involve financial advice – care should be taken that the solicitor has the necessary expertise to advise
• It may prove necessary to ask the lender to disclose financial information about the debtor’s finances to the proposed guarantor/cautioner. Again here the Mortgage Code makes clear that this may be required and a waiver of confidentiality may be needed by the lender but equally by the agent where he has knowledge of the debtor’s financial affairs.  This may often mean not completing the advice in a single visit. The more pressure put on a solicitor to complete the matter quickly, the greater the potential risk.
• If the point of the exercise is to ensure there is adequate separate legal advice given to the spouse, the spouse should effectively be treated as an entirely separate and distinct client, rather than a “consensual add-on” to the husband’s file. Lord Nicholls did not require separate advice for spouses and considered that in many cases the husband’s agent would be best placed to advise the wife, being familiar with the business and the family circumstances.  However, the 1986 Practice Rules should not be forgotten either.  There is an exception for spouses to the general rule that a solicitor may not act for two or more parties whose interests may conflict but this does not apply where there is an actual conflict and a guarantee by a spouse is always a potential conflict. 
• Additionally, it may be prudent to have a separate meeting with the spouse, rather than a rushed discussion whilst the husband is sent out of the room.   This physical separation of dealings may reinforce the message of Etridge but was not seen as essential in the case.
• As with any other client, make sure the message has been delivered clearly.  It may be up to the solicitor to manage the client’s expectations upwards: i.e. making sure they know they are not just signing “a bit of paper” but are committing themselves to a course of action with potentially huge ramifications.   Spouses will often regard the entire process as a huge imposition on their time for nothing more than legal “form-filling”. Solicitors will, however, have to reconcile these requirements with the fact that there may be no real alternative for the spouse. The whole family finances may be intricately bound up with the transaction and without the security the family business may fail, along with the only source of income.
• Make sure there are adequate records on file regarding the advice given to the client and the instructions to proceed.
• Although not an essential element in Lord Nicholls’ formulation, make sure that the advice is followed up by letter and that the letter is actually received by the spouse. In Broadway the letter was collected from the solicitor’s office and it was claimed that it had never been seen by the wife. If necessary, get a copy signed and returned for the file. There will only be one person in the firing line if the lender is unable to enforce a security through an Etridge/Smith claim!

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 in the Professional Liabilities Division at Marsh UK Limited